Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Efficiency Wages in Heterogeneous Labour
Markets
Jan Průša, Pavel Ryska
Institute of Economic Studies
Charles University in Prague, Czech Republic
ISEO, 24th June 2011
Jan Průša, Pavel Ryska — Efficiency Wages in Heterogeneous Labour Markets
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Research topic
Research question
Do efficiency wages lead to unemployment?
Jan Průša, Pavel Ryska — Efficiency Wages in Heterogeneous Labour Markets
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Contents
1 Efficiency wages
2 Model with homogeneous labour
3 Model with heterogeneous labour
4 Conclusions
Jan Průša, Pavel Ryska — Efficiency Wages in Heterogeneous Labour Markets
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Contents
1 Efficiency wages
2 Model with homogeneous labour
3 Model with heterogeneous labour
4 Conclusions
Jan Průša, Pavel Ryska — Efficiency Wages in Heterogeneous Labour Markets
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
The Idea of an Effort function
A bit of intuition . . .
Definition
The existence of an effort function assumes increasing
relationship between wages and effort.
This means that the productivity of a worker increases with
higher wage.
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Notes on unemployment
Mises on unemployment
Unemployment in the unhampered market is always
voluntary.
Ludwig von Mises: Human Action
Unemployment in positive science
We only care about involuntary unemployment.
Jan Průša, Pavel Ryska — Efficiency Wages in Heterogeneous Labour Markets
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Contents
1 Efficiency wages
2 Model with homogeneous labour
3 Model with heterogeneous labour
4 Conclusions
Jan Průša, Pavel Ryska — Efficiency Wages in Heterogeneous Labour Markets
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Simple efficiency wage model
Solow (1979) and Shapiro-Stiglitz (1984) propose:
1 Existence of an effort function
higher wage ⇔ higher effort and productivity
2 Firms have to set higher wages
3 Equilibrium wage is higher than market clearing wage
4 ⇒ There is involuntary unemployment as market outcome
Jan Průša, Pavel Ryska — Efficiency Wages in Heterogeneous Labour Markets
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Firm optimization
The logic of firm optimization does not change in the presence
of an effort function.
Market clearing condition:
unit wage per unit effort = marginal product of effort
Intuitive logic
The firm is now choosing units of effort and then hires the
appropriate amount of labour which can supply this effort.
Jan Průša, Pavel Ryska — Efficiency Wages in Heterogeneous Labour Markets
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Consequences of effort optimization
Impact on the labour market
Firm can choose labour with high or low effort.
Hence labour is not homogeneous.
Market clearing price is the effort price, not hourly wage.
Does the model really result in unemployment?
Jan Průša, Pavel Ryska — Efficiency Wages in Heterogeneous Labour Markets
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Contents
1 Efficiency wages
2 Model with homogeneous labour
3 Model with heterogeneous labour
4 Conclusions
Jan Průša, Pavel Ryska — Efficiency Wages in Heterogeneous Labour Markets
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Effort-types of labour
Market interaction with heterogeneous labour:
1 Workers voluntarily choose their effort
This implies T discrete labour markets
2 Firms know these effort markets
3 ⇒ Each effort-type (sub-)market has its own market
clearing wage
4 ⇒ There is no involuntary unemployment
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Lancaster model (1966)
Goods market:
Labour market:
Goods have
characteristics
Workers have
characteristics
Example:
Cars
Comfort, speed, fuel
efficiency. . .
Example:
Economic analyst
Knows statistical methods,
is entertaining. . .
Consumers demand
characteristics
Firms demand
characteristics
Jan Průša, Pavel Ryska — Efficiency Wages in Heterogeneous Labour Markets
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Lancaster model: Market interaction
Firms demand characteristics, but they can only hire workers.
The characteristics input is not perfectly divisible.
The resulting market clearing is non-trivial.
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Lancaster model: Key results
There are two important results of the Lancaster model.
Potential for unemployment
Not all labour types are demanded. (!)
Market clearing mechanism
If workers want to find a job, they need to substantially
change:
their effort;
their price (wage).
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Wrap-up
Zero unemployment
Unemployment in this model is voluntary, stemming from
wage-characteristic mismatch.
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Contents
1 Efficiency wages
2 Model with homogeneous labour
3 Model with heterogeneous labour
4 Conclusions
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Reasons for unemployment
Why do we see unemployment?
It is voluntary
Effort-wage mismatch
Market frictions:
Wage rigidity (unions and strikes)
Labour regulations (minimum wage)
Taxation (capital ↔ labour substitution)
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Conclusions
Relationship between wages and productivity is natural
and such an optimization does not cause involuntary
unemployment.
Models of labour market need to take heterogeneity
into account.
Demand for labour characteristics offers a much more
realistic approach to labour markets.
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Introduction Efficiency wages Model with homogeneous labour Model with heterogeneous labour Conclusions
Conclusions
Thank you for your attention.
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