Essays on wage determination with market frictions

Abstract

In this study, I discuss some of the well-established labor economic theories, dealing with the wage determination on the market with frictions. In early 1970s, economists developed new theories incorporating market frictions because the traditional frictionless framework of supply and demand could not satisfactorily answer many important questions. Why do unemployed workers sometimes choose to remain unemployed by turning down job offers? What determines the duration of employment and unemployment spells? How can we simultaneously have unemployed workers and unfilled vacancies? In this dissertation I focus on the two most established theories: the efficiency wage theory and the search theory. In chapter 1, I discuss the controversy between "the worker discipline" theory and "the efficiency wage" theory. The former states the relationship between wages and worker supervision is positive, thus to increase workers`` effort a simultaneous increase in wage and supervision is necessary. The latter claims the between wages and supervision is negative and thus increase in wage (or in supervision) is alone sufficient to increase workers`` effort. Both theories found support in the empirical research which implies that both positive and negative relationship between wage and supervision are possible under certain circumstances. I introduce a model that can account for both, the efficiency wage theory and for the worker discipline theory, by extending the Shapiro and Stiglitz model (1984). I clearly define the conditions determining the relationship between wage and supervision by introducing a contract size as an additional variable in the model. The employer is able to infer the type of the effort function of his workers and thus the correlation between the wage and supervision simply by observing reactions to his past actions and the output levels. If, for example, he increases firing rate q ceteris paribus (supervision q/m increases, while wage remains the same) a...