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Is perfection optimal? Employment and product market competition

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  • Amable, Bruno
  • Gatti, Donatella

Abstract

This paper proposes a model of efficiency wage with endogenous workers flows in interaction with imperfect competition on the product markets. Subject to economy-wide shocks, firms hire and fire workers thus generating a certain turnover. We show that the intensity of this turnover negatively affects workers' incentives and induces higher efficiency wage premia. Increased competition pushes real wages up but effort incentive requirements prevent large wage adjustments. Hence, adjustments are made with quantities: both the separation and hiring rates increase with competition, increasing the wage premium and contributing to lower employment. As a consequence, an employmentmaximising level of competition may exist.

Suggested Citation

  • Amable, Bruno & Gatti, Donatella, 2000. "Is perfection optimal? Employment and product market competition," Discussion Papers, Research Unit: Economic Change and Employment FS I 00-304, WZB Berlin Social Science Center.
    • Handle: RePEc:zbw:wzbece:fsi00304
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    References listed on IDEAS

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    Cited by:

    1. Zhiqi Chen & Bo Zhao, 2014. "Unemployment and product market competition in a Cournot model with efficiency wages," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 47(2), pages 555-579, May.

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    More about this item

    Keywords

    unemployment; efficiency wage; imperfect competition;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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