Wage Setting in Modern Labor Markets: Neither Fair Nor Efficient

Ekkehart Schlicht

No 26, IZA Policy Papers from Institute of Labor Economics (IZA)

Abstract: The increasing wage inequality in many countries is usually seen as brought about by economic forces that drive for economic efficiency within a changing technological and social environment. Ethical evaluations of these developments diverge, yet the view that free labor markets drive to efficiency remains undisputed. This note sets out to criticize, in a non-technical manner, this efficiency presumption which is based on Adam Smith’s theory of wage setting. It is urged that a Smithian wage structure would indeed be both efficient and fair. Yet modern labor markets work in ways that are fundamentally different to what was envisaged by Adam Smith. That makes the outcomes observed in modern labor markets, according to Smithian standards, both inefficient and unfair. As a consequence, the pursuit of the Smithian ideal requires organizational remedies, intervention and regulation in labor markets.

Keywords: inequality; compensating differentials; equalizing differentials; fairness; efficiency; efficiency wages; selection wages; Reder competition; collective organization; taxation; over-qualification (search for similar items in EconPapers)
JEL-codes: B1 D3 H2 J2 J3 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2011-04
New Economics Papers: this item is included in nep-lab
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