I was reading about efficiency wages. For reference, the idea of efficiency wages is that firms will institute a wage that is above the market-clearing price in order to avoid shirking, turnover, etc., thus causing unemployment. When a recession rolls around, this means that firms will not cut wages because there will be a corresponding decline in productivity. All of this seems to be incorrect. If there is a wage that, if bid up, would increase MRP, then it is logical that firms would do so. Since labor would be more productive with this higher wage, logically whatever extra quantity supplied (in this case labor) would be absorbed since it would be able to provide additional MRP, since the demand curve would have moved to the right in recognition of this new-found productivity, as it would in other cases that cause greater productivity. As for firms refusing to lower wages when a recession comes around, due to a corresponding decrease in productivity, firms do not truly have a choice but to reduce their wages. Being that the extra product they derive from having their current wages does not produce a justifiable MRP in the first place, it would make sense for the firm to reduce wages down, past other wages with negative MRPs, until they reach the elastic range on the labor supply curve.
What do you all think?
Seems about right to me - the higher wage acts as a stimulus to boost productivity. Once productivity increases in line with the higher wage, a new market-clearing wage is established.
-Jon
To darkness I condemn you...
Ah, the beauty of it all is that the very thing that causes the recession in the first place also has a tendency to reduce wages when the 'liquidity injections' are really cranked up to bail out the banks.
Kind of like today where everything but monetary policy is blamed on the falling real wages people are receiving even though it is an intentional side effect.
Don't really know how this really relates to your question though.
Parsidius:For reference, the idea of efficiency wages is that firms will institute a wage that is above the market-clearing price in order to avoid shirking, turnover, etc., thus causing unemployment.
The way you have that worded seems to suggest that the higher wage causes unemployment. Typo?
Anonymous Coward: Ah, the beauty of it all is that the very thing that causes the recession in the first place also has a tendency to reduce wages when the 'liquidity injections' are really cranked up to bail out the banks. Kind of like today where everything but monetary policy is blamed on the falling real wages people are receiving even though it is an intentional side effect. Don't really know how this really relates to your question though. Parsidius:For reference, the idea of efficiency wages is that firms will institute a wage that is above the market-clearing price in order to avoid shirking, turnover, etc., thus causing unemployment. The way you have that worded seems to suggest that the higher wage causes unemployment. Typo?
No, that is the idea of Keynesian efficiency wages; the efficiency wage is higher than the supposed market-clearing wage and thus causes unemployment. Seeing as how the efficiency wage affects MRP and thus makes each additional unit of labor more valuable, the efficiency wage should really be the market-clearing wage.
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