Effort—Wage Relations, Choice of Technique, and the Urban Employment-Absorption Problem

The paper deals with some determinants of urban labor-supply absorption. This paper challenges the usual view of wage rate as an equilibrating mechanism whereby unemployment leads to lower wages which in turn encourage the introduction of more labor-intensive capital that increases demand for labor. The rational reasons for the introduction of laborsaving equipment even under conditions of unemployment is derived by considering the concept of effort per worker. Because labor contracts for continuous relationships are imprecise with regard to effort, effort variation exists. The degree to which inputs are underutilized is the degree of ‘ X -inefficiency’. Since effort depends partly on motivation, lower wages may result in more than a proportionately lower value of effort; firms will not want to minimize the wage per man-year that they pay but the wage per unit of effort. Capital-intensive techniques may (up to a certain point) be ‘effort-stretching’, stimulating a higher level of effort per worker. Under such circumstances unemployment would not lead to the introduction of more labor-intensive capital nor necessarily to the absorption of the unemployed.