A Criticism of Efficiency Wage Models

A Dodge Critique

Underlying Phenomenon

Wage rates are stable across business cycles- increasing at relatively modest rates- not increasing at all- rarely decreasing

(Dickens et al. 2007, Kahn 1997, Messina 2010)

Some Data (from Kahn, 1997)

On the One Hand

-Efficiency Wage Theorists (Neo/New Keynesians) make the causal claim:Stable Wages → Involuntary Unemployment

-Price-Centric Ontology

On the Other

The Heterodox position I advocate claims there is no causal relationship between the two.

My claim: Wage stability is an integral feature of the going business enterprise.

The General Idea

Workers are paid a real wage above the market clearing rate. Paying less than the above stated wage would reduce productivity of everyone already employed.

Brands of Efficiency

- Shirking- Labor Turnover- Adverse Selection- “Sociological”

Theoretical Wrinkles

-How can it be the case that all knowing agents have signal-extraction problems?-Why is it the case that entrepreneurs can’t enter the different markets and ingeniously concoct contracts, monitoring devices, or counseling services to mitigate wage rigidity?-Are wage rigidities even possible in a neoclassical economy? (no)

Efficiency Wage Surveys

Agell 1995, 2003, 2007; Bewley 1995, 1999, 2004; Blinder 1990; Campbell 1997; Fehr 1998; Kaufman 1984; Frantz 2006

Result -- The only model substantiated by the evidence is the “sociological” model (i.e. morale models).

Asking about Prices Asks the Wrong Question

—-Bewley and others commit both experimenter and subject

bias in their surveys.

-By asking about wages, the interviewer guides the

interviewee towards appropriate answers (experimenter). -

Also, the interviewee will typically answer questions given

to them in ways that seem sensible, even if such questions

aren’t relevant to how they do things (subject).

Have Relative Prices Ever Empirically Determined the Level of Employment?

A Heterodox Approach

Three Component Parts- Market Governance- Organizational Design- Decision Making

Market Governance

—Fligstein describes market governance as “the general rules

in a society that define relations of competition,

cooperation, and market-specific definitions of how firms

should be organized” (Fligstein 1996, 657).

- The Community Wage Survey

Community Survey

- Originally, the survey was a device used by corporations to collude on wage rates.

- Essentially, enterprises exist in wage cartels, which depend on how they conduct their wage survey(s).

Organizational Design

-Enterprises are arranged in silos.(HR, Accounting, Inventory, etc)

- Managers may only coordinate with each other once every 6 or 12 months.

Decision Making

—-The world is fundamentally uncertain, but even in environments of complete

certainty the brain lacks the computing power to deal with many situations. As

a result, agents rely on habits and rules of thumb. (programmed decisions)

—-Non-programmed decisions (wage changes) would take a considerable amount

of time because they enter uncharted territory.

-Agents behave in a manner consistent with adaptive expectations, and go through processes of thermostatic adjustment. (March 2000; Sterman 1988, 1989, 2000; many others, too numerous to list)

Putting it All Together

A Typical Wage Setting Process1) Job Design and Evaluation2) Community Survey3) Enterprise Adjustments

How Often Are Wage Reviewed?

- Typically, semi-annually or annually.- Special Occasions

Why Do Wages Change?

-If the Job Classification changes, escalator adjustment during the annual review, or for a one time bonus.

Why Are Wages Stable?-Enterprises want stability. (Stable cost-structures are key)

-Given that wage rates are set through cartels (and not through marginal calculations), what wage rate would an enterprise adjust to?

-As listed above, price adjustments aren’t part what enterprises do.

-Besides, falling wages wouldn’t solve the falling sales problem for the enterprise anyway.