Wage inequality and overeducation in a model with efficiency wages

Abstract.  This paper shows that the existence and persistence of 'overeducation' can be explained by an extension of the efficiency wage model. When calibrated to fit the amounts of overeducation found in most empirical studies, the model implies that both the relative wage and the relative employment of high‐skill workers depend inversely on aggregate economic activity. Keeping aggregate employment constant, furthermore, low‐skill unemployment rises, following an increase in the relative supply of high‐skill labour, and relative wages may be insensitive to changes in relative labour supplies. The model may help to explain rising wage inequality in some countries since the early 1970s. JEL classification: J31     

Output persistence from monetary shocks with staggered prices or wages under a Taylor Rule

We analytically examine output persistence from monetary shocks in a DSGE model with staggered prices or wages under a Taylor Rule. Surprisingly, while Taylor-style staggering never yields persistence, Calvo-style staggering of wages does generate persistence under decreasing returns to labour.     

Trembles in extensive games with ambiguity averse players

We introduce and analyze three definitions of equilibrium for finite extensive games with imperfect information and ambiguity averse players. In a setting where players’ preferences are represented by maxmin expected utility, as characterized in Gilboa and Schmeidler (J Math Econ 18(2):141–153, 1989), our definitions capture the intuition that players may consider the possibility of slight arbitrary mistakes. This generalizes the idea leading to trembling-hand perfect equilibrium as introduced in Selten (Int J Game Theory 4(1):25–55, 1975), by allowing for ambiguous trembles characterized by sets of distributions. We prove existence for two of our equilibrium notions and relate our definitions to standard equilibrium concepts with expected utility maximizing players. Our analysis shows that ambiguity aversion can lead to behavioral implications that are distinct from those attained under expected utility maximization, even if ambiguous beliefs only arise from the possibility of slight mistakes in the implementation of unambiguous strategies.     

Multi-attribute procurement auctions with risk averse suppliers

We analyze multi-attribute procurement auctions with risk-averse suppliers. As the number of suppliers increases or the suppliers become more risk-averse, the equilibrium bidding price decreases under the first-score auction but remains the same under the second-score auction. A buyer prefers the first-score auction.     

Range convexity and ambiguity averse preferences

We show that range convexity of beliefs, a `technical' condition that appears naturally in axiomatizations of preferences in a Savage-like framework, imposes some unexpected restrictions when modelling ambiguity averse preferences. That is, when it is added to a mild condition, range convexity makes the preferences collapse to subjective expected utility as soon as they satisfy structural conditions that are typically used to characterize ambiguity aversion. Received: February 25, 2000; revised version: April 17, 2000     

Tariff reforms with rigid wages

This paper analyses the effects of tariff reforms on welfare and market access in a competitive small open economy, which is characterised by involuntary unemployment due to non-market clearing wages that are fixed either in terms of the numeraire or in real terms. We show that recent tariff-reform results can be extended to integrated reforms of tariffs and the wage rate, and that the inherent tension between reforms that increase welfare and market access carries over. We also derive welfare increasing tariff-reform strategies that keep the wage rate constant and show that this tension may be attenuated. We thank Peter Neary, an anonymous referee, as well as participants at the GEP Conference on New Directions in Trade Theory and at the ETSG Annual Conference in Athens for helpful comments. We acknowledge gratefully financial support from the Leverhulme Trust under Programme Grant F114/BF.     

Market wages,reservation wages,and retirement decisions

The paper is an empirical cross-section study of the retirement decisions of American white men between the ages of 58 and 67, predicated on the theoretical notion that an individual retires when his reservation wage exceeds his market wage. Reservation wages are derived from an explicit utility function in which the most critical taste parameter is assumed to vary both systematically and randomly across individuals. Market wages are derived from a standard wage equation adjusted to the special circumstances of older workers. The two equations are estimated jointly by maximum likelihood, which takes into account the potential selectivity bias inherent in the model (low-wage individuals tend to retire and cease reporting their market wage). The model is reasonably successful in predicting retirement decisions, and casts serious doubt on previous claims that the social security system induces many workers to retire earlier than they otherwise would. The normal effects of aging (on both market and reservation wages) and the incentives set up by private pension plans are estimated to be major causes of retirement.     

Trading mechanism selection with directed search when buyers are risk averse

We endogenize the trading mechanism selection in a model of directed search with risk averse buyers and show that the unique symmetric equilibrium entails all sellers using fixed price trading. Mechanisms that prescribe the sale price as a function of the realized demand (auctions, bargaining, discount pricing, etc.) expose buyers to the “price risk”, the uncertainty of not knowing how much to pay in advance. Fixed price trading eliminates the price risk, which is why risk averse customers accept paying more to shop at such stores.     

Efficiency wages and union-firm bargaining with private information

We consider efficiency wage effects in a union-firm bargaining model with private information. We show that an increase in the efficiency wage effects does not necessarily increase the wage level at equilibrium, even when the wage bargaining with private information is close to one with complete information. However, if it is commonly known that the firm is stronger than the union and the demand is sufficiently elastic, then an increase in the efficiency wage effects increases for sure the wage at equilibrium.JEL Classification: J41, J50, J52We thank Juan Dolado and two anonymous referees for valuable comments. Vincent Vannetelbosch is Chercheur Qualifié at the Fonds National de la Recherche Scientifique. The research of Ana Mauleon has been made possible by a fellowship of the Fonds Européen du Développement Economique Régional (FEDER). Financial support from the Belgian French Communitys program Action de Recherches Concertée 99/04-235 (IRES, Université catholique de Louvain) is gratefully acknowledged.     

A note on Kuhn’s Theorem with ambiguity averse players

Kuhn’s Theorem shows that extensive games with perfect recall can equivalently be analyzed using mixed or behavioral strategies, as long as players are expected utility maximizers. This note constructs an example that illustrates the limits of Kuhn’s Theorem in an environment with ambiguity averse players who use a maxmin decision rule and full Bayesian updating.     

Market interconnection and wages

We show that wage behavior as well as the skilled–unskilled wage gap depend on elasticity of import demand. Although, our analysis is in the spirit of the Stolper–Samuelson theorem, factor intensity plays no role in our results.     

Agglomeration and fair wages

Abstract.  This paper implements a fair wage constraint into an analytically tractable core-periphery agglomeration model. This enables us to study the role of imperfect labour markets for the pattern of agglomeration. In the short run, a marginal increase in fair wage preferences leads to an unambiguous compression of the national factor price differential between skilled and unskilled labour, involving an increase in the unemployment rate of unskilled workers. In the long run, this mechanism renders full dispersion of an unstable equilibrium already at higher trade costs than in perfect labour markets. There is a tendency for fair wage preferences to enforce agglomeration.     

On some classes of normed and risk averse preferences

This paper develops a general approach to analyzing the expansion path of preferences. A framework is introduced that looks for modelling risk aversion using a normed distance defined on a real vector space. In this approach the distance between any two indifference curves is unambiguously measured by the absolute difference of a function depending on the utility. This forms a natural basis for analyzing the special case of an ? _p norm. Furthermore, a link is made to the limit case of p = ?? allowing to encompass as a special case CARA preferences. Finally, some notion of normed equivalent is proposed and duality results are established.     

Median stable matching for markets with wages

We define the median stable matching for two-sided matching markets with wages and prove constructively that it exists.     

A class of incomplete and ambiguity averse preferences

This paper characterizes models of ambiguous beliefs in the absence of the completeness axiom. We axiomatize multiple-selves versions of some of the most important examples of complete and ambiguity averse preferences, and characterize when those incomplete preferences are ambiguity averse.     

Employment and wages with sector-specific shocks and worker moral hazard

We study a model of worker moral hazard with identical workers and where sectoral prices are subject to stochastic shocks. When firms are short-run maximizers, employment is shown to be distorted downward relative to the case of certain prices, and more so the higher is the current price. This implies that employment is relatively insensitive to sectoral output-price changes, and that average employment and output are reduced when price volatility increases. When firms can commit to future employment levels, employment is greater in low-demand states (implying labor hoarding), and thus even less sensitive to shocks, while average employment is less distorted downward by uncertainty. The model gives a new explanation of how increased sector-specific volatility can lead to output losses, and of the possibility of negative comovements of unemployment and turnover.     

Efficiency wages and income taxes

The paper was written during a visit at the Ludwig-Maximilian-University of Munich in the summer of 1988. The hospitality of this institution, as well as the financial support from a Ruhrgas Scholarship under the West German Norwegian Scholarship Scheme, is gratefully acknowledged. Participants at various seminars have given useful comments and criticism. I am also grateful to two anonymous referees for their comments to an earlier version of the paper.     

Unemployment,wages and pensions

Empirical evidence has shown the existence of a negative relationship between the rates of unemployment and real wages. If pensions are computed according to the wages that workers have contributed, then the unemployment rates during working life may also influence the pensions to which they are entitled. Using data from 2005 to 2012 for the Spanish social security system, we estimate that the unemployment elasticity of real pension is ?0.135. A 1% increase in unemployment rate is associated with a reduction in pension equal to 0.135%. In ‘normal times’, this value could be considered modest, but the Great Recession has increased dramatically the rate of unemployment. In 2012, the rate of unemployment in Spain had increased to 25.7% and in 2015, it had diminished to 20.9%. It is estimated that unemployment rate will not be returned to figures existing before the crisis until middle of the next decade. Moreover, the current reforms in social security systems could interact with the future effects of the current rates of unemployment and cause future pensions to be significantly lower than those estimated by individuals. The economic welfare of the future cohorts of retirees would then be significantly worsened.     

Computers,skills and wages

Computer technology is most prominently used by skilled, high-wage workers. This suggests that computer use requires skills to take full advantage of the possibilities, which are particularly present among relatively skilled workers. This article develops a simple technology adoption model showing that the decision to adopt computer technology depends on (i) the tasks to be performed, (ii) the level of skill or education and (iii) the level of wages. Applying this model to British data, it is shown that the effect of wages and particular tasks on computer adoption is larger than the effect of skills on adoption. The estimates suggest that in Britain computer use is likely to be a matter of cost efficiency and not so much of workers’ skills.