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The Wage-Productivity Hypothesis: Its Economic Consequences and Policy Implications

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  • Joseph E. Stiglitz

Abstract

This paper explores the implications for less developed countries the hypothesis that workers' productivity depends on the wages they receive. In particular, we show that this hypothesis may explain the high urban wages and unemployment found in many such countries. The market equilibrium is shown not to be pareto efficient. If the government could not control urbaxv'rural migration, but could control wages and urban employment, it would, in general, set wages and employment levels differently. The sources of Inefficiency are identified. The (constrained) pareto optimal policy can be implemented via taxes and subsidies; but two instruments (both specific and ad valorern wage tax/subsidies) are required. More generally, policy changes will affect both the urban wage and the level of unemployment, and these consequences need to be taken into accounce, both In the determination of shadow wages to be used in cost benefit analysis and In the analysisis of the incidence of any set of taxes and subsIdIes. The shadow price of labor may differ markedly from what it would be if wages were arbitrarily fixed and there were no migration. In particular, in the special case of the Harris-Todaro migration model, with fixed rural wages and productivity depending only on the absolute wage received, the shadow wage is the market wage, regardless of the relative evaluation of current and future consumption. Shadow prices under other specifications of the wage-productivity relationship are analyzed.

Suggested Citation

  • Joseph E. Stiglitz, 1986. "The Wage-Productivity Hypothesis: Its Economic Consequences and Policy Implications," NBER Working Papers 1976, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1976
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    1. Todaro, Michael P, 1969. "A Model for Labor Migration and Urban Unemployment in Less Developed Countries," American Economic Review, American Economic Association, vol. 59(1), pages 138-148, March.
    2. Stiglitz, Joseph E, 1985. "Equilibrium Wage Distribution," Economic Journal, Royal Economic Society, vol. 95(379), pages 595-618, September.
    3. Schlicht, Ekkehart, 1978. "Labour Turnover, Wage Structure, and Natural Unemployment," Munich Reprints in Economics 1255, University of Munich, Department of Economics.
    4. Stiglitz, Joseph E, 1973. "Approaches to the Economics of Discrimination," American Economic Review, American Economic Association, vol. 63(2), pages 287-295, May.
    5. Robert E. Hall, 1975. "The Rigidity of Wages and the Persistence of Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 301-350.
    6. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    7. Salop, S. C., 1973. "Wage differentials in a dynamic theory of the firm," Journal of Economic Theory, Elsevier, vol. 6(4), pages 321-344, August.
    8. Calvo, Guillermo, 1979. "Quasi-Walrasian Theories of Unemployment," American Economic Review, American Economic Association, vol. 69(2), pages 102-107, May.
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    Cited by:

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    2. Pastor, Manuel Jr. & Conroy, Michael E., 1995. "Distributional implications of macroeconomic policy: Theory and applications to El Salvador," World Development, Elsevier, vol. 23(12), pages 2117-2131, December.
    3. Paige Ouimet & Elena Simintzi, 2021. "Wages and Firm Performance: Evidence from the 2008 Financial Crisis [The effect of wage bargains on the stock market value of the firm]," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 10(2), pages 273-305.
    4. Manik Kumar & Sweety Pandey, 2021. "Wage Gap Between Formal and Informal Regular Workers in India: Evidence from the National Sample Survey," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 13(1), pages 104-121, January.

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