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Efficiency Wages and Futures Markets

Author

Listed:
  • Wong, Kit P.

    (affiliation not available)

  • Broll, Udo

    (Dresden University of Technology)

Abstract

This paper places the competitive firm a la Sandom in a standard efficiency wage model, wherein the work effort of labor depends on the wage rate set by the firm. Irrespective of the availability of hedging opportunities, we show that the Solow condition under which the equilibrium effort-wage elasticity equals unity is a norm. Thus, the optimal wage rate paid by the firm is invariant to the risk attitude of the firm and to the incidence of output price uncertainty. We further show that hedging activities induce the firm to hire more labor as a result of a reduction in its risk exposure. Thus, the introduction of futures markets is a beneficial in that employment is increased and output is enhanced.

Suggested Citation

  • Wong, Kit P. & Broll, Udo, 1999. "Efficiency Wages and Futures Markets," IZA Discussion Papers 28, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp28
    as

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    More about this item

    Keywords

    efficiency wages; price uncertainty; futures markets;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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