Quarterly Journal of Austrian Economics

Efficiency Wages and Involuntary Unemployment Revisited

The Quarterly Journal of Austrian Economics
Downloads

Volume 15, No. 3 (Fall 2012)

In this paper we tackle two shortcomings of the present efficiency wage models. Firstly, they do not fully account for labor heterogeneity, thus implying that high-effort and low-effort units of labor are interchangeable. Secondly, building on this assumed homogeneity of labor, the models derive involuntary unemployment from effort decisions of workers, which are patently voluntary. We offer a consistent reformulation of the theory: Each of the effort or quality levels is regarded as a separate market which has its own clearing quantity and price. As such unemployment is a result of workers’ reluctance to adjust to the prevailing market conditions on the respective labor sub-market. To further clarify heterogeneity in labor markets, we propose to employ the demand for workers’ characteristics instead of the demand for workers. This microeconomic approach shows that in standard equilibrium, employers will not choose among all workers but only select specific characteristic-types. Therefore, to become attractive, an unemployed worker has to significantly alter either his wage or the bundle of offered characteristics. Both of these modifications reinforce our central claim that free market interaction cannot lead to unemployment other than voluntary.

CITE THIS ARTICLE

Ryska, Pavel and Jan Průša. “Efficiency Wages and Involuntary Unemployment Revisited.” The Quarterly Journal of Austrian Economics 15, No. 3 (Fall 2012): 277–303.

All Rights Reserved ©
What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. 

Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Become a Member
Mises Institute