Working Paper: CEPR ID: DP4503
Authors: Jean-Pierre Danthine; Andr Kurmann
Abstract: The missing wage rigidity in general equilibrium models of efficiency wages is an artifact of the external wage reference perspective conventionally adopted by the literature. Efficiency wage models based on an internal wage reference perspective are capable of generating strong wage rigidity. We propose a structural model of efficiency wages that is broadly consistent with the reported evidence on fairness in labour relations and rent-sharing. Our model provides a robust explanation for wage rigidity and procyclical effort. It also rationalizes reciprocal behaviour by workers and the observation that firm productivity is a significant predictor of wage setting.
Keywords: efficiency wages; reciprocity; rent-sharing; wage rigidity
JEL Codes: E24; E32; J50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decrease in labor demand (J23) | decline in wage reference (J31) |
| decline in wage reference (J31) | firms lower wages (J39) |
| firms lower wages (J39) | decrease in productivity (O49) |
| decrease in payroll (J65) | increase in wage reference (J31) |
| increase in wage reference (J31) | firms maintain wage rigidity (J39) |
| shocks to productivity (O49) | shift in labor demand curve (J29) |
| shocks to productivity (O49) | shift in wage-setting curve (J31) |
| shift in labor demand curve (J29) | neutralize wage fluctuations (J31) |
| shift in wage-setting curve (J31) | keep real wages stable (E64) |