CT:
“Is the 1984 Stiglitz-Shapiro efficiency wage model really a sticky wage model, or not? Is the real or nominal wage sticky in this model? »
Claude:
The 1984 Stiglitz-Shapiro efficiency wage model is not essentially a model of sticky wages, although it may have implications for wage stickiness. Let’s break this down:
- Central concept of the model: The Stiglitz-Shapiro model essentially aims to explain why firms might pay wages above the market equilibrium level. The key idea is that higher wages can increase productivity by: a) reducing evasion (since workers have more to lose if they are caught and fired) b) reducing turnover costs c) improving the quality of job candidates d) boosting the morale and efforts of workers
- Wage rigidity in the model:
- The model does not directly predict sticky wages in the traditional sense of wages that are slow to adjust to economic shocks.
- However, this explains why wages might not fall even in the face of unemployment. Companies have an incentive to maintain higher wages to preserve productivity gains.
- Real or nominal wages:
- The model mainly focuses on real wages and not nominal wages.
- The efficiency wage is set in real terms because it is the purchasing power of the wage that affects worker behavior and productivity.
- Implications for wage rigidity:
- Although not a rigid wage model per se, the concept of efficiency wages can contribute to wage rigidity.
- Businesses may be reluctant to cut real wages, even during an economic downturn, because it could reduce productivity more than it would save on labor costs.
- Difference from traditional rigid salary models:
- Traditional rigid wage models often focus on nominal rigidities due to factors such as long-term contracts or menu costs.
- The Stiglitz-Shapiro model provides a real microeconomic basis for why wages might not adjust downward, even if they are not formally “sticky.”
In summary, although the Stiglitz-Shapiro efficiency wage model is not explicitly a model of sticky wages, it nevertheless provides insight into why wages might be sticky, particularly on the downward side. The emphasis is on real wages rather than nominal wages, and rigidity results from the productivity-enhancing effects of higher wages rather than from institutional or contractual factors.
TC again; What percentage of professional economists could give an answer of comparable quality and nuance?
