Publication detail

Efficiency Wages and Involuntary Unemployment Revisited

Author(s): Jan Průša M.Phil. (Cantab), Ph.D.,
MPhil Pavel Ryska Ph.D.,
Type: Articles in refereed journals
Year: 2012
Number: 3
Published in: The Quarterly Journal of Austrian Economics
Publishing place:
Keywords: Labour market; efficiency wages; involuntary unemployment; demand for heterogeneous goods.
JEL codes: J64, J20
Suggested Citation:
Grants: GACR P402/11/0948 Developing Analytical Framework for Energy Security: Time-Series Econometrics, Game Theory, Meta-Analysis and Theory of Regulation GAČR č. P402/12/0982: Trade Flows in Times of Economic Boom and Slump: Modifying the Gravity Model for Country, Time and Product-Specific Decision-Making GAUK 684012 Determinants of Economic Efficiency in Czech Enterprises GAUK 89910 Measuring Bank Efficiency
Abstract: In this paper we tackle two shortcomings of present efficiency wage models. Firstly, they do not fully account for labour heterogeneity, thus implying that high-effort and low-effort units of labour are interchangeable. Secondly, building on this assumed homogeneity of labour, the models derive involuntary unemployment from effort decisions of workers, which are patently voluntary.
We offer a consistent reformulation of the theory: Each of the effort or quality levels is regarded as a separate market which has its own clearing quantity and price. As such unemployment is a result of workers' reluctance to adjust to the prevailing market conditions on the respective labour sub-market.
To further clarify heterogeneity in labour markets, we propose to employ the demand for workers' characteristics instead of the demand for workers. This microeconomic approach shows that in standard equilibrium employers will not choose among all workers but only select specific characteristic-types. Therefore to become attractive, an unemployed worker has to significantly alter either his wage or the bundle of offered characteristics.
Both these modifications reinforce our central claim that free market interaction cannot lead to unemployment other than voluntary.
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