Efficiency Wages and Labor Mobility in an Open Economy
40 Pages Posted: 15 Feb 2006
Date Written: October 1993
The paper analyzes the role of labor market segmentation and relative wage rigidity in the transmission process of macroeconomic shocks in a two-sector optimizing model of a small open economy. The analysis is first conducted in the context of perfect intersectoral labor mobility. The discussion is then extended to consider the existence of short-run constraints on labor movements. The results highlight the role of efficiency considerations in the behavior of sectoral wages. A deflationary policy induces a reallocation of labor across sectors, but has no long-run effect on the unemployment rate.
JEL Classification: E24, J23, J42
Suggested Citation: Suggested Citation