Re: Piorot on Madrick

[Ben Day <day@xxxxxxxxxxxxxx>]

At 01:01 PM 9/7/2002 -0500, Paul Davidson wrote:
> MADRICK: Similarly, new classical economists argue that markets are so
> efficient that unemployment is largely voluntary. For the most part, they
> say, people who are out of work can find jobs if they are willing to work
> for less. Government cannot really help them. Mr. Akerlof argues that in
> real life, businesses often pay more than the market wage to retain good
> workers, bolster morale or create incentives to work harder.
>
> PAUL: But if that is the case then increasing the money wage rate will
> increase the productivity of workers by giving them an incentive to work
> harder!!  Why should not the wage  per worker be raised to that paid the
> CEO of the company?

This is probably paraphrased from his Nobel address, but I'd guess it
refers to Akerlof's and Yellen's "Fair Wage-Effort Hypothesis" (see
Quarterly Journal of Economics 105 (May 1990): 255-283), just one of a
bunch of so-called "efficiency wage" theories. They're not saying that
there's anything like an elastic relationship between wages and
productivity, such that there'd be proportional returns for paying workers
CEO-level salaries, just that workers who feel that their wages are
unfairly low compared to others' pay (regardless if they are paid at or
above the market-clearing wage) will try to "get even" (their words) and
reduce work effort. Akerlof and Yellen try to integrate this into labor
market segmentation theory by showing that a large number of "segregated"
firms (firms that hire only low-wage workers, and thus partially eliminate
fairness as an issue for workers - at least so they claim), by increasing
the demand for low-wage workers, will increase the fair-wage paid to
workers in "integrated" firms (those with low and high-wage workers, where
fairness becomes an issue and sub-fair wages will cost you). Or in other
words, they try to use the relation between relative deprivation and work
effort to explain the persistence of wage differentials between
industries... Many parts of the hypothesis I don't find terribly
compelling, though, due to the narrow horizon of relative deprivation they
seem to focus on (in which it is primarily our co-workers in regards to
whom we determine what is fair), the assumption that demand for low-wage
labor generated by firms being "segregated" (hiring only low-wage workers)
is actually significant in determining changes in total demand for low-wage
labor - which we have to accept for the dynamic raising fair-wages in
integrated firms to take place (although I don't know precisely why they
rely on this dynamic), and beyond this ignoring many other important
explanations for inter-industry wage divergences (e.g. how large
"integrated" firms are also more likely to be "core firms" operating in
oligopolistic industries with minimal price competition and higher and more
stable returns, and very low exit-rates/minimal danger of insolvency).

-----Ben