Towards a More Complete Efficiency Wage Theory

Abstract

The efficiency wage is an important topic in the theory of employment. In a traditional efficiency wage model, only the representative firm is optimizing against an assumed S‐shaped effort supply function. This S‐shaped supply curve is critical for the model and the absence of a derivation of the curve in the literature means that it is an incomplete theory. In the present paper, we extend the model by specifying a worker's representative utility function so that the corresponding argmax function will be the S‐shaped effort supply curve. This will make the worker's decision process endogenous and will produce a more complete model. The importance of this extension is clear. The characterization of the utility function will make explicit the necessary conditions and crucial assumptions of the traditional model. More importantly, the extension will allow researchers to introduce employment compensation factors into the worker's utility function for analysis. This has important bearings on future development in employment theory. For example, a worker's satisfaction from shirking (net of dismissal risks), or his or her willingness to search for jobs (net of search cost), can now be included in his or her utility function to form an optimal work or search strategy. Incorporating the worker's optimization behaviour into the model will also enable researchers to study policy directed not just towards firms but also towards the worker's decision process. Furthermore, this approach provides a framework for researchers to generate comparative statics. These comparative statics can lead to interesting topics for econometric models or to further research within this field.

Efficiency-wage competition and nonlinear dynamics

“…Along this dimension -following Hahn (1987) and Guerrazzi (2013Guerrazzi ( , 2017 -the e¤ort function is assumed to be strictly concave. As suggested by Wu and Ho (2012), this e¤ort speci…cation implies that there is a real wage o¤er such that   = 0 -in the present case   =   ( ¡   )that can be dubbed as the minimum wage. Such an institutional feature of the labour market is implicitly neglected by contributors of the e¢ciency-wage theory that modeled workers' productivity in a di¤erent manner.…”

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

“…2 Recognizing that energy requirements of employed workers -as measured by consumed caloriesare given by an exponential combination of their effort and their body mass, Dalgaard and Strulik (2011) show that a concave effort function can be derived from physiological principles. In addition, as argued by Wu and Ho (2012), an effort function like the one in eq. (2) implies the existence of a positive firm-specific minimum-wage defined as…”

“…On a general equilibrium perspective, a tentative to track down reduced forms for workers' preferences implied by the concave and sigmoid effort specifications by means of straightforward integration can be found, respectively, inGuerrazzi (2013) andWu and Ho (2012).…”