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Title: Efficiency Wages Revisited: The Internal Reference Perspective

Author(s): Jean-Pierre Danthine and André Kurmann

Publication Date: August 2004

Keyword(s): efficiency wages, reciprocity, rent-sharing and wage rigidity

Programme Area(s): International Macroeconomics

Abstract: The missing wage rigidity in general equilibrium models of efficiency wages is an artifact of the external wage reference perspective conventionally adopted by the literature. Efficiency wage models based on an internal wage reference perspective are capable of generating strong wage rigidity. We propose a structural model of efficiency wages that is broadly consistent with the reported evidence on fairness in labour relations and rent-sharing. Our model provides a robust explanation for wage rigidity and procyclical effort. It also rationalizes reciprocal behaviour by workers and the observation that firm productivity is a significant predictor of wage setting.

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Bibliographic Reference

Danthine, J and Kurmann, A. 2004. 'Efficiency Wages Revisited: The Internal Reference Perspective'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4503