Critically Evaluate the Extent to Which Efficiency Wage Theory Can Provide an Explanation of Unemployment
CRITICALLY EVALUATE THE EXTENT TO WHICH EFFICIENCY WAGE THEORY CAN PROVIDE AN EXPLANATION OF UNEMPLOYMENT
Unemployment of workers is a comment and recurrent problem in the labour market in most of the countries. Unemployment is defined as an excess supply of labour at prevailing wage. It means that the labour market is unable to be clear. A lot of the economists attempt to find out the cause of it. And the efficiency wage theory is widespread acceptable for explaining the involuntary unemployment in the modern theory, which is defined as the proportion of the labour force which is actively seeking a job at the existing wage level, but unable to get one. As Akerlof and Yellon(1986) pointed out, the common factor in efficiency wage models is that "in equilibrium, an individual firm's production costs are reduced if it pays a wage in excess of market clearing and thus there is equilibrium involuntary unemployment." Some authors support this explanation for unemployment. Unfortunately, some others, however, criticize that explanation from different points. In the following, the efficiency wage models, some of the supporting and the critiques are illustrated respectively.
The efficiency wage was developed and formulated by Solow(1979), known as the Solow Condition. It presents the relationship between the wage and productivity. This model is assumed an economy which consists of a large number of identical perfectly competitive firms with a production function and the workers are same, which means there the existence of persistent, non-compensation wage differentials across firms, and the firm is a profit maximiser, being able to set the flexible wage. The Solow Condition show that in order to maximise profitð (ð=pF[e(w)N]-wN, Where F[e(w)N] is product function, p is the price of output, N is the number of workers). Subject to w>v (where v is the workers' alternative wage), the firm's optimal strategy is to set an efficiency wage w*, and hire workers up to that
Unemployment of workers is a comment and recurrent problem in the labour market in most of the countries. Unemployment is defined as an excess supply of labour at prevailing wage. It means that the labour market is unable to be clear. A lot of the economists attempt to find out the cause of it. And the efficiency wage theory is widespread acceptable for explaining the involuntary unemployment in the modern theory, which is defined as the proportion of the labour force which is actively seeking a job at the existing wage level, but unable to get one. As Akerlof and Yellon(1986) pointed out, the common factor in efficiency wage models is that "in equilibrium, an individual firm's production costs are reduced if it pays a wage in excess of market clearing and thus there is equilibrium involuntary unemployment." Some authors support this explanation for unemployment. Unfortunately, some others, however, criticize that explanation from different points. In the following, the efficiency wage models, some of the supporting and the critiques are illustrated respectively.
The efficiency wage was developed and formulated by Solow(1979), known as the Solow Condition. It presents the relationship between the wage and productivity. This model is assumed an economy which consists of a large number of identical perfectly competitive firms with a production function and the workers are same, which means there the existence of persistent, non-compensation wage differentials across firms, and the firm is a profit maximiser, being able to set the flexible wage. The Solow Condition show that in order to maximise profitð (ð=pF[e(w)N]-wN, Where F[e(w)N] is product function, p is the price of output, N is the number of workers). Subject to w>v (where v is the workers' alternative wage), the firm's optimal strategy is to set an efficiency wage w*, and hire workers up to that