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Wage Bargaining Versus Efficiency Wages: A Synthesis

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  • Jon Strand

Abstract

We construct a model integrating the efficiency wage model of Shapiro–Stiglitz (1984) (SS), with an individual wage bargaining model in the Diamond–Mortensen–Pissarides (DMP) tradition where firms and workers form pairwise matches. We show that when workers may threaten to shirk on the job and there is individual wage bargaining, the wage is always higher and employment lower than in either the SS model, or the (appropriately modified) DMP model. When firms determine workers’ efforts unilaterally, efforts are set inefficiently low in the SS model. In the bargaining model, effort is higher, and is first best when the worker non–shirking constraint does not bind. The overall equilibrium allocation may then be more or less efficient than in the SS model, but is always less efficient than in a pure bargaining model with no moral hazard.

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  • Jon Strand, 2003. "Wage Bargaining Versus Efficiency Wages: A Synthesis," Bulletin of Economic Research, Wiley Blackwell, vol. 55(1), pages 1-20, January.
    • Handle: RePEc:bla:buecrs:v:55:y:2003:i:1:p:1-20
    DOI: 10.1111/1467-8586.00159
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    References listed on IDEAS

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    Cited by:

    1. Uwe Jirjahn, 2006. "A Note on Efficiency Wage Theory and Principal–Agent Theory," Bulletin of Economic Research, Wiley Blackwell, vol. 58(3), pages 235-252, July.
    2. Mark Bils & Yongsung Chang & Sun-Bin Kim, 2022. "How Sticky Wages in Existing Jobs Can Affect Hiring," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(1), pages 1-37, January.
    3. Fernando Zanella, 2008. "Different times, different commitments, but the same old practices: failure of the efficiency wage model for socially devoted firms," Economics Bulletin, AccessEcon, vol. 10(9), pages 1-6.
    4. Wim Meeusen & Vesna Stavrevska & Glenn Rayp, 2011. "Efficiency Wages, Unemployment Benefits and Union—Firm Wage Bargaining: The Issue of the Choice of the Outside Option," Journal of Labor Research, Springer, vol. 32(1), pages 75-86, March.
    5. Tobias Kronenberg, 2008. "How does reciprocal behaviour of workers influence the wage setting of unions?," Spanish Economic Review, Springer;Spanish Economic Association, vol. 10(4), pages 303-320, December.

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