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Contracts, Wage Differentials and Involuntary Unemployment

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  • Debraj Ray

Abstract

I study a simple model of labour markets with imperfect monitoring and efficiency wages that provide work incentives. Involuntary unemployment is an outcome, but it is just one particular instance of many inter-firm wage differentials that pervade the equilibrium. The goal of this paper is to study the relationship between firm size, work standards, wages paid, contractual utility for workers, and capital intensity in production. Under certain conditions: (a) larger firms pay higher wages and demand higher individual effort levels; (b) despite these opposing effects, larger firms offer a higher net contractual utility and (c) larger firms are more capital intensive, even when production functions are homothetic in capital and labour. JEL Classifications: D33, J31, J41

Suggested Citation

  • Debraj Ray, 2024. "Contracts, Wage Differentials and Involuntary Unemployment," Studies in Microeconomics, , vol. 12(1), pages 10-31, April.
    • Handle: RePEc:sae:miceco:v:12:y:2024:i:1:p:10-31
    DOI: 10.1177/23210222241245533
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    References listed on IDEAS

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    More about this item

    Keywords

    Choice under uncertainty; consumer choice; general equilibrium; information economics;
    All these keywords.

    JEL classification:

    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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