Interfirm, Interregional, and International Differences in Labor Productivity: Variations in the Levels of 'X-Inefficiency' as a Function of Differential Labor Costs
STUDIES IN ECONOMIC RATIONALITY: XEFFICIENCY EXAMINED AND EXTOLLED, Mark Perlman, Klaus Weiermair, eds., University of Michigan Press, pp. 323-350, 1990
Posted: 24 Jan 2010
Date Written: 1990
Economists have traditionally attempted to explain productivity differences between firms, regions and nations by focusing upon differences in capital-labor ratios, the quality of labor and capital, and the quality and quantity of investment in human capital. However, Harvey Leibenstein argues that the productivity between firms can also be explained by differences in the motivational systems embodied by firms and countries. Many firms produce X-inefficiently; X-inefficiency is usually related to market imperfections but can exist in perfectly competitive product markets because low wages protect the firm. However, the increased pressure caused by higher wages can induce them to reduce X-inefficiency and thereby increase labor productivity. To the extent at which wage differentials and wage increases affect the degree of X-inefficiency, it can be shown that high wages need not cause increases in unit cost or reductions in profit. Relatively high wages can be shown to induce greater economic efficiency and hence contribute towards improving the potential material well-being of society.
Keywords: Firm, Regional, Capital-labour ratio, Productivity, Human capital, Leibenstein, X-inefficiency
JEL Classification: J24, J30, N10
Suggested Citation: Suggested Citation