Wage Differences Matter: An Experiment of Social Comparison and Effort Provision when Wages Increase or Decrease

Wage rates, efficiency wages, and gift exchange in a labor market are all crucial aspects in regard to designing contracts to ensure high effort from workers. We extend this literature by discussing the relationship between known differences in wages (social comparison) and workers’ effort provision. We conduct an experiment in which subjects perform effort tasks for piece-rates. All subjects are paid the same wage rate in the first half of the experiment, but in the second half are paid different wage rates; the primary variable we study is the information about others’ wage rates given to a subset of subjects. We find that subjects’ efforts respond strongly to information about others’ wages. Such findings have implications for contract structuring for workers.

Unemployment

This chapter offers a wide-ranging review of the macroeconomics of unemployment and related issues. Setting the scene with definitions, motivation, and facts, the discussion proceeds to a baseline wage and price setting model, which offers some first key insights. Formal models of trade unions and efficiency wages, and of the less standard, but topical, dual labour markets, are developed next. Dynamic issues, such as hysteresis and its underpinning factors, are also discussed. A major subsequent theme is the flows and search-based recent theory, emphasizing job creation and destruction, hiring and firing costs, and the Beveridge Curve. Additionally, the effects of technical progress on unemployment, wage inequality, and job polarization are discussed. The chapter concludes with a review of the high European unemployment of the 1980s and 1990s and the ‘shocks versus institutions’ debates on its causes.

The Minimum Wage Puzzle in Less Developed Countries

We show that a dynamic general equilibrium model with efficiency wages and endogenous capital accumulation in both the formal and (non-agricultural) informal sectors can explain the full range of confounding stylized facts associated with minimum wage laws in less developed countries.