Involuntary Unemployment and Efficiency-Wage Competition

Abstract

This chapter 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.

Citation

Guerrazzi, M. (2014), "Involuntary Unemployment and Efficiency-Wage Competition", New Analyses of Worker Well-Being (Research in Labor Economics, Vol. 38), Emerald Group Publishing Limited, Leeds, pp. 193-210. https://doi.org/10.1108/S0147-9121(2013)0000038006