Volume 15, No. 3 (Fall 2012)
In this paper we tackle two shortcomings of the present efficiency wage models. Firstly, they do not fully account for labor heterogeneity, thus implying that high-effort and low-effort units of labor are interchangeable. Secondly, building on this assumed homogeneity of labor, the models derive involuntary unemployment from effort decisions of workers, which are patently voluntary. We offer a consistent reformulation of the theory: Each of the effort or quality levels is regarded as a separate market which has its own clearing quantity and price. As such unemployment is a result of workers’ reluctance to adjust to the prevailing market conditions on the respective labor sub-market. To further clarify heterogeneity in labor markets, we propose to employ the demand for workers’ characteristics instead of the demand for workers. This microeconomic approach shows that in standard equilibrium, employers will not choose among all workers but only select specific characteristic-types. Therefore, to become attractive, an unemployed worker has to significantly alter either his wage or the bundle of offered characteristics. Both of these modifications reinforce our central claim that free market interaction cannot lead to unemployment other than voluntary.
