AN EFFICIENCY‐WAGE‐HOURS MODEL AND SHORTER WORKING HOURS

DOIhttp://doi.org/10.1111/j.1467-9485.1991.tb00305.x
Publication Date01 May 1991
Date01 May 1991
AuthorJan Beyer Schmidt‐Brensen
Scorrrsh
Journal
of
Polrrrcol
Economy,
Vol.
38.
No
2,
May
1991
0
1991
Scoiiirh Economic Society
AN
EFFICIENCY-WAGE-HOURS MODEL AND
SHORTER WORKING HOURS
JAN
BEYER SCHMIDT-SBRENSEN*
Aarhus
School
of
Business,
Denmark
I
INTRODUCTION
In recent years the efficiency-wage model has achieved great recognition in
explaining why firms may find it profitable to pay wages in excess
of
market
clearing and thereby also in explaining involuntary unemployment; see Akerlof
and Yellen
(1986)
and Stiglitz
(1987).
The basic efficiency-wage hypothesis
states that workers’ productivity depends positively on their wage income.
Broadly speaking the reason for such
a
relationship may be due to moral
hazard, turnover costs, adverse selection and sociological reasons; e.g.
a
higher
wage rate makes the firms capable of attracting workers with above average
productivity and it reduces the incentives to shirk because the cost
of
being
detected-and laid-off-increases. The relationship between wages and produc-
tivity has two effects relevant for wage and employment determination,
namely, that an increase in the wage rate that increases productivity reduces the
amount
of
labour needed to produce
a
given output, while production becomes
more profitable which tends to increase labour demand.
Thus, regardless
of
the specific explanation for the relationship from wages
to
work effort, a higher wage rate raises not only the marginal labour cost, but
the marginal revenue product
of
labour as well. This means that in a situation
where the wage rate that maximizes a firm’s profit is higher than the wage rate
that clears the labour market, the firm will find it unprofitable to cut the wage
rate, since reducing the wage rate may actually lower the work effort more than
proportionately and increase labour costs. The efficiency-wage model is there-
fore consistent with equilibrium involuntary unemployment contrary to the
standard neoclassical model, where firms will reduce the wage rate in the pres-
ence
of
an excess supply
of
labour. On the other hand, the efficiency-wage
economy is presumably constrained Pareto inefficient, see Greenwald and
Stiglitz
(1988).
The purpose here is to extend the efficiency-wage model to an efficiency-
*
This paper
is
part
of
my Ph.D. dissertation.
I
would like
to
thank Torben
M.
Andersen,
Peter Jensen, Ssren Harck and Peder
J.
Pedersen for their valuable comments. This paper
is
a thorough revision
of
the paper entitled ‘Efficiency wages and shorter working hours’ pre-
sented at the Second Annual Congress
of
the European Economic Association, Copenhagen,
1987.
Date
of
receipt
of
final manuscript:
26
April
1990.
113
114
JAN BEYER SCHMIDT-SBRENSEN
wage-hours model in which the production technology allows for efficiency
effects from both wages and working hours
on
the work effort
of
labour. This
implies that the desired working time as seen from the point of view
of
the firms
may be derived and compared with the standard working time and possible
hours constraints external
to
the firms.
Shorter standard working time has often been proposed as
a
means against
unemployment. Several studies state that the wage behaviour plays a crucial
role among other factors concerning whether or not unemployment will
fall
in
response to reduced working time, see e.g. Andersen (1987) and Hart (1987).
Apparently, there seems to be a trade-off between the degree
of
wage compen-
sation and the effects
on
the level
of
employment. In this paper we analyse
whether this trade-off is affected or disappears in an economy with efficiency-
wage setting. Furthermore, the efficiency-wage-hours model makes it possible
to
determine when
it
is optimal for the firms to offer some positive degree
of
wage compensation to their employees, i.e. the degree
of
wage compensation
becomes endogenous in this model. This endogenous determination
of
the wage
rate and the degree
of
wage compensation are contrary to most papers analys-
ing the effects
of
shorter standard working hours; wages are predetermined in
these papers, see Hart (1987) for an excellent survey.
In the union bargaining models in Hoel (1984), Calmfors (1985) and Booth
and Schiantarelli (1987),
in
the efficiency-wage model in Hoel and Vale (1986)
and in the efficiency-wage-hours model in Hart and Ruffell (1989), wages are
endogenously determined. The efficiency-wage-hours model in this paper is far
more general than the model in Hoel and Vale (1986), where the focus is only
on
the turnover aspect
of
the efficiency-wage hypothesis and for certain aspects
also more general than the model in Hart and Ruffell (1989). Mookherjee
(1988) introduces efficiency effects from working hours in the adverse selection
version
of
the efficiency-wage model, but the focus
is
not
on
shorter working
hours but instead
on
involuntary unemployment and worker self-selection;
concerning the efficiency-hours model see also Booth and Ravallion (1988) and
FitzRoy
(1988).
In
the efficiency-wage literature the wage income affects productivity and in
the literature concerning shorter working time the hours
of
work affect produc-
tivity.
These two elements are combined in formulating the efficiency-wage-
hours model
in
Section
11.
In
Sections
111
and
IV
the effects
of
shorter standard
working time are analysed. The focus is
on
short run effects
on
the wage rate,
actual working hours and employment among other things. Section V examines
the wage-employment trade-off. Some concluding comments are given
in
Section
Vl.
THE
EFFICIENCY-WAGE-HOURS MODEL
The
work
eflort
function
Consider a representative competitive firm producing
a
single output
Q
by the
use
of
workers
L
with working hours
H.
The firm produces subject
to
the

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