Efficiency Wage Considerations Research Articles

Working Time Reduction and Employment in a Finite World

We study the consequences of a working time reduction (WTR hereafter) in an exogenous growth model with unemployment (due to efficiency wage considerations) and a renewable natural resource. The resource is an essential input whose marginal productivity is bounded by physical laws. In the laissez-faire equilibrium, firms set headcount employment, working time and a wage level which affects workers' effort. We show that if a WTR always decreases the total number of worked hours, its impact on the number of (un)employed crucially depends on the relative scarcity of the resource. If the ressource inflow is unlimited, the economy converges toward a balanced growth path and a WTR lowers the levels of output, employment and wages along this path, without affecting their growth rate. When the resource inflow is finite, the economy converges toward a stationary state. In this case, a WTR increases the stationary level of hourly wages and employment if the resource is scarce enough (which is for instance the case if the labour and capital saving technical progress is unbounded). Furthermore, the long-term elasticity of employment (resp., of the hourly wage) to the cut in hours is larger (resp., smaller) when the resource is scarcer. The transitory dynamics toward the stationary state is studied numerically. As far as the impact of a WTR on employment and wage are concerned, this analysis confirms the results put forward for the stationary state.

Efficiency Wages and the Economic Effects of the Minimum Wage: Evidence from a Low‐Wage Labour Market*

AbstractThis article exploits a natural experiment provided by the 1999 introduction of the UK National Minimum Wage (NMW) to test for efficiency wage considerations in a low‐wage sector, the UK residential care homes industry. The empirical results provide support to the wage‐supervision trade‐off prediction of the shirking model and suggest that the NMW may have operated as an efficiency wage in the care homes sector, leading to a reduction in supervision costs. These findings can explain earlier evidence suggesting that although the NMW introduction increased wages dramatically in the care homes sector, it generated only moderate negative employment effects.

Why Pay Seniority Wages?

This paper characterises establishments that pay higher seniority wages than their competitors. It tests whether seniority wages are paid on the basis of agency, human capital or efficiency wage considerations. A representative linked employeremployee panel and an innovative two-step estimation strategy are used to first calculate individual seniority wages taking into account that match quality biases tenure effects on wages. Then individual seniority wages are aggregated to the establishment level. Finally, the seniority wage indicator is explained by establishment characteristics. This contribution shows that large, profitable and establishments with a highly qualified workforce pay high seniority wages. Also collective bargaining coverage and works councils have a positive impact and the share of foreigners, training intensity and initial wage levels have a negative correlation with seniority wages. The results support an agency based motivation for seniority wages.

Profit Sharing and Unemployment: An Approach with Bargaining and Efficiency-Wage Effects

We offer a unified framework to analyse the determination of employment, employee effort, wages, and profit sharing when firms face stochastic revenue shocks. We apply a generalized Nash bargaining solution, which extends the wage bargaining literature by incorporating efficiency-wage considerations, profit sharing, and exogenous capital structure. The profit-sharing instrument is demonstrated to have positive effort-enhancing and wage-moderating effects, which exactly offset the negative dilution effect in equilibrium. We show that the introduction of profit sharing decreases equilibrium unemployment if the benefit replacement ratio is high enough, whereas the reverse holds if the benefit replacement ratio is low.

Efficiency Wages and Industry Wage Differentials: A Comparison Across Methods of Pay

Efficiency wage considerations should be less important for piece-rate pay than for time wages. Therefore, if industry wage differentials reflect efficiency wage factors, then these pay differences should be less sizable and have less explanatory power for piecework than for timework. We test this proposition using wage data for male production workers employed in the Swedish metalworking industries in 1985. The data are partitioned into two groups of workers. In our preferred sub-sample of workers who received pay under both piece rates and time wages, our results are uniformly consistent with efficiency wage implications for industry wage differentials. For the subsample of workers who received pay under either piece rates or time wages, industry wage differentials are of equal importance under either pay scheme. These latter results, however, may also be influenced by unaccounted for sorting of workers and employers across methods of pay. Overall, our examination of industry wage differentials across m...

Capital Structure, Wage Bargaining and Employment

We offer a unified framework to analyze the determination of employment, employee effort, wages, profit-sharing and capital structure when firms face stochastic revenue shocks. We apply a generalized Nash bargaining solution, which extends the wage bargaining literature by incorporating efficiency wage considerations, profit-sharing and capital structure. The profit-sharing instrument is demonstrated to have positive effort-augmenting and wage-moderating effects, which exactly offset the negative dilution effect in equilibrium. Leverage is shown to decrease employment and to have a strategic commitment value as a wage-moderating effect for firms facing unions in bilateral wage negotiations. Finally, some implications for equilibrium unemployment are characterized.

Technological change, relative wages, and unemployment

This paper examines the effect of skilled-biased technological shocks on the structure of wages and the composition of employment in a two-sector economy with a heterogeneous work force. Efficiency wage considerations, turnover costs and minimum wage legislation lead to labor market segmentation and equilibrium unemployment. The analysis focuses on the effects of a technological shock that raises the demand for skilled labor and reduces the demand for unskilled labor, in such a way that the total demand for labor in the primary (high wage) sector remains constant at initial wages. The presence of efficiency considerations implies that such a shock tends to reduce total employment in that sector, as the equilibrium increase in skilled labor employment is smaller than the drop in the employment of unskilled labor. Efficiency factors and initial unemployment are shown to magnify the adverse employment effects of pro-skilled technological progress.

Technological Change, Relative Wages, and Unemployment

This paper examines the effect of skill-biased technological change on the structure of wages, the composition of employment and the level of unemployment in a two-sector economy with a heterogenous work force. Efficiency wage considerations and minimum wage legislation lead to labor market segmentation. A technological shock that reduces the demand for unskilled labor and raises the demand for skilled labor in the primary, high-wage sector is shown to increase the relative wage of skilled workers and reduce aggregate employment as well as the employment level of unskilled workers in that sector. The net effect of the shock on the employment level of skilled workers is mitigated by the existence of efficiency factors.

Macroeconomic Adjustment with Segmented Labor Markets

This paper analyzes the macroeconomic effects of fiscal and labor market policies in a small open developing country. The basic framework considers an economy with a large informal production sector and a heterogeneous work force. The labor market is segmented as a result of efficiency considerations and minimum wage laws. The basic model is then extended to account for unemployment benefits, income taxation, and imperfect labor mobility across sectors. Under the assumption of perfect labor mobility, we show that a permanent reduction in government spending on nontraded goods leads in the long run to a depreciation of the real exchange rate, a fall in the market-clearing wage for unskilled labor, an increase in output of traded goods, and a lower stock of net foreign assets. A permanent reduction in the minimum wage for unskilled workers improves competitiveness, and expands the formal sector at the expense of the informal sector. Hence, in a two-sector economy in which the minimum wage is enforced only in the formal sector and wages in one segment of the labor market are competitively determined, efficiency wage considerations do not alter the standard neoclassical presumption. A reduction in unemployment benefits is also shown to have a positive effect on output of tradable goods by lowering both the level of efficiency wages and the employment rent of skilled workers.

Technological Change, Relative Wages, and Unemployment

This paper examines the effect of skill-biased technological change on the structure of wages, the composition of employment and the level of unemployment in a two-sector economy with a heterogenous work force. Efficiency wage considerations and minimum wage legislation lead to labor market segmentation. A technological shock that reduces the demand for unskilled labor and raises the demand for skilled labor in the primary, high-wage sector is shown to increase the relative wage of skilled workers and reduce aggregate employment as well as the employment level of unskilled workers in that sector. The net effect of the shock on the employment level of skilled workers is mitigated by the existence of efficiency factors.

Technology, international competitiveness, and union behavior

Union opposition to a free trade agreement with Mexico affirms the conventional wisdom that international trade damages the union movement. This study uses data from the March and May CPS for 1984 to 1987 to investigate this issue for production workers. The results indicate that union wages are not influenced by greater trade at medium union densities. However, at low union densities, greater imports (exports) reduce (increase) wages with the opposite pattern occurring at high union densities. The union wage pattern is consistent with product market considerations playing a strong role at low union densities and end game considerations playing a strong role at high union densities. In general, nonunion wages are not significantly impacted by greater trade. After controlling for imports and exports, nonunion wages are much greater in internationally competitive industries while union wages are not significantly greater in competitive industries. Nonunion wages appear to be more influenced by efficiency wage considerations. Thus, a Mexican free trade agreement will have little influence on union wages and should increase nonunion wages.

On the interaction between efficiency wages and union-firm bargaining models

Even when efficiency wage considerations are taken into account, firms may have no incentive to pay wages above the competitive minimum. The total value of output therefore may be increased if workers in the efficiency wage sector also possess bargaining power. Efficiency wage and insider-outsider models may also reinforce each other.

Employment Determination in British Industry: Investigations Using Micro- Data

This paper derives, and then estimates, a model of employment where unions and firms bargain over wages and possibly employment, and efficiency wage considerations may be important. It illustrates the difficulties associated in interpreting many existing attempts to discriminate between alternative models. The results (based on over 200 U.K. firms) suggest that employment is negatively related to the firm's own wage and the change in the own wage relative to outside opportunities. The latter may be an efficiency wage effect. Various financial factors are also seen to have a significant effect on employment.

The union-nonunion wage differential over the business cycle: Evidence from PSID

There is some prior evidence [Lewis (1963), Mellow (1981), Freeman (1984) to support the notion that union wage premium is counter-cyclical. This phenomenon may be a product of union wage rigidity (which results from: (a) long-term union contracts, and (b) union reliance on layoffs due to seniority dominance rather than work-share practices in response to worsening economic conditions) and efficiency wage considerations. This paper, within a pooled cross-section time-series framework, empirically tests for the presence of perceived counter-cyclical nature of the union-nonunion wage differential using the PSID data from 1979–1984. Results from this study do support the presence of counter-cyclical union wage premium during the time period studied.

Efficiency wages and local versus central wage bargaining

A simple efficiency wage model is extended to allow for the presence of unions. The presence of unions aggravates the unemployment caused by efficiency wage considerations. Provided the labour demand elasticity is not too much larger than one, local (firm level) wage bargaining gives a higher negotiated wage than central wage bargaining, implying higher unemployment under local wage bargaining than under central wage bargaining.

Efficiency wages in Weitzman's share economy

Weitzman (1985) proposes widespread profit or revenue sharing as a way of guaranteeing low levels of equilibrium unemployment and stability in the face of shocks. When efficiency wage considerations are important, the benefits of the share economy are largely eliminated.