The Economics of Exogenous Increases in Wage Rates in a Behavioral/X-Efficiency Model of the Firm

Abstract

Standard neoclassical theory predicts that higher real wage rates result in less employment and a lower rate of employment growth than would otherwise exist with lower real wage rates.1 Thus, exogenous interventions in the labor market which serve to increase real wage rates, such as effective minimum wage legislation and effective unionization, are said to have deleterious effects on the economy. Underlying these dominant theoretical propositions and their concomitant policy prescriptions, which decry minimum wage legislation and the existence of trade unions, is the assumption that given a prevailing factor input mix, higher wage rates do not affect labor productivity.2 But for this to hold true, on average, those firms affected by minimum wage legislation and unions must be maximizing output per unit of labor input, or as Harvey Leibenstein puts it, firms must be operating x-efficiently. Leibenstein’s general x-efficiency theory suggests, however, that as a rule, labor productivity in the firm is not maximized; therefore, the firm generally tends to produce x-inefficiently.3 KeywordsLabor ProductivityWage RateEmployment GrowthEconomic AgentUnit Production CostThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.