Involuntary Unemployment and Efficiency-Wage Competition

Abstract

This paper introduces a model of efficiency-wage competition along the lines put forward by Hahn (1987). Specifically, I analyze a two-firm economy in which employers screen their workforce by means of increasing wage offers competing one another for high-quality employees. The main results are the following. First, using a specification of effort such that the problem of firms is well-behaved, optimal wage offers are strategic complements. Second, the symmetric Nash equilibrium can be locally stable under the assumption that firms adjust their wage offers in the direction of increasing profits by conjecturing that any wage offer above (below) equilibrium will lead competitors to underbid (overbid) such an offer. Finally, the exploration of possible labor market equilibria reveals that effort is counter-cyclical

Efficiency-Wage Competition: What Happens as the Number of Players Increases?

“…In this paper, confirming the intuitions put forward by Summers (1988), I show that in an efficiency-wage economy populated by many firms in which internal wage offers enter the production possibilities in a labour-augmenting way whereas external offers do exactly the opposite, optimal wage bids are always strategic complements (cf. Guerrazzi, 2013). By contrast, the effects on the equilibrium levels of the wage, employment and profit driven by an increase of the number of firms are strictly related to the path of the wage measured in efficiency units.…”

“…The strategic implications of the wage setting behaviour of firms as well as the consequences triggered by an increase in the number of players, however, remain completely on the background (cf. Guerrazzi, 2013;Guerrazzi and Sodini, 2018). Although it did not reach any clear conclusion, these important aspects of the wage setting process have been somehow addressed by the most recent literature on wage competition.…”

“…On the output side, following Guerrazzi and Sodini (2018) and Guerrazzi (2013), I assume that each productive unit -no matters the size of N -is endowed with the following production function:…”

“…As stated in the introduction, a special feature of this paper is that I will take into consideration two distinct well-behaved analytical alternatives that have been widely exploited in the theoretical applications of the efficiency-wage theory. On the one hand, extending the expressions in Hahn (1987) and Guerrazzi (2013), I consider a concave specification given by…”

“…In previous works, such a strategic relationship for the optimal wage behaviour of firms has been dubbed as efficiency-wage competition, i.e., a situation in which the profit-maximizing wage bid of a given productive unit depends on the wage bids put forward by all the other firms operating in the economy (cf. Guerrazzi, 2013;Guerrazzi and Sodini, 2018).…”