Efficiency Wages Revisited: The Internal Reference Perspective

36 Pages Posted: 8 Sep 2004

See all articles by Jean-Pierre Danthine

Jean-Pierre Danthine

University of Lausanne - Institute of Banking and Finance (IBF); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

André Kurmann

Drexel University - LeBow College of Business

Date Written: August 2004

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 labor relations and rent-sharing. Our model provides a robust explanation for wage rigidity and procyclical effort. It also rationalizes reciprocal behavior by workers and the observation that firm productivity is a significant predictor of wage setting.

Keywords: Efficiency wages, wage rigidity, rent-sharing, reciprocity

JEL Classification: E24, E32, J50

Suggested Citation

Danthine, Jean-Pierre and Kurmann, André, Efficiency Wages Revisited: The Internal Reference Perspective (August 2004). Available at SSRN: https://ssrn.com/abstract=588264

Jean-Pierre Danthine (Contact Author)

University of Lausanne - Institute of Banking and Finance (IBF) ( email )

Lausanne, 1015
Switzerland
+41 21 692 3485 (Phone)
+41 21 692 3335 (Fax)

HOME PAGE: http://www.hec.unil.ch/jdanthine/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

André Kurmann

Drexel University - LeBow College of Business ( email )

School of Economics
3220 Market Street
Philadelphia, PA 19104
United States

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