Wage inequality as a worker discipline device under full employment

Jaylson Silveira () and Gilberto Lima

No 2026_12, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: The persistence of wage inequality among observationally equivalent workers remains a salient feature of labor markets, even under full employment. Empirical evidence indicates that higher wages raise on-the-job effort and that persistent wage differentials partly reflect firms’ strategic wage-setting behavior. This paper extends the canonical efficiency wage framework by incorporating firm heterogeneity in wage-setting. In equilibrium, wage inequality functions as a worker discipline device under full employment. As the proportion of efficiency-wage firms rises, the efficiency-to-competitive wage ratio increases monotonically, while the wage Gini coefficient follows an inverted-U pattern, underscoring a nonlinear trade-off between effort incentives and wage dispersion.

Keywords: Heterogeneous wage-setting; efficiency wage; competitive wage; discipline device; full employment; wage inequality; wage Gini coefficient (search for similar items in EconPapers)
JEL-codes: J30 J31 J41 J64 (search for similar items in EconPapers)
Date: 2026-04-10
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