RESIDUAL WAGE DISPERSION WITH EFFICIENCY WAGES

Suphanit Piyapromdee ()

International Economic Review, 2018, vol. 59, issue 3, 1315-1343

Abstract: This article extends a classic on‐the‐job search model of homogeneous workers and firms by introducing a shirking problem. Workers choose their effort levels and search on the job. Firms elicit effort through wages and monitoring; an inverse relationship between wages and monitoring rates is derived. Wages play a dual role by allocating labor supply and motivating employee effort. This gives rise to an equilibrium wage distribution that contrasts with existing literature. In particular, I show that a hump‐shaped and positively skewed wage distribution, as observed empirically, can be derived even when firms and workers are, respectively, identical.

Date: 2018
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