TC:
“Is the Stiglitz-Shapiro 1984 wage model a sticky wage model, or not? Does real or nominal income stick to that model?”
Claude:
The Stiglitz-Shapiro efficiency wage model from 1984 is not a sticky wage model, although it can contribute to wage stickiness. Let’s break this down:
- The main idea of this model: The Stiglitz-Shapiro model is about explaining why firms may pay wages above the market clearing level. The important understanding is that higher wages can increase productivity by: a) Reducing avoidance (as workers lose more if they are caught and fired) b) Lowering benefit costs c) Improving the quality of job applicants d) Encouraging employee morale and effort.
- Salary attachment to the model:
- The model does not directly predict sticky wages in the usual way of wages being slow to adjust to economic shocks.
- However, it provides a reason why wages may fall even in the face of unemployment. Firms have an incentive to keep wages high to preserve productivity gains.
- Real wages versus minimum wages:
- The model deals primarily with real wages, not nominal wages.
- The effective wage is set in real terms, as it is the purchasing power of wages that affects the behavior and productivity of workers.
- Implications of wage stability:
- Although not a sticky wage model per se, the concept of efficiency wages can contribute to wage stability.
- Firms may be reluctant to reduce real wages even during a recession because doing so would reduce productivity in addition to saving labor costs.
- Differences from traditional fixed income models:
- Traditional sticky-wage models often focus on fixed costs due to factors such as long-term contracts or menu costs.
- The Stiglitz-Shapiro model provides a real, less economic basis for why wages may not move downward, even if they are not officially “sticky.”
In summary, while the Stiglitz-Shapiro efficiency wage model is not a definitive model of sticky wages, it provides insight into why wages may be sticky, especially when they go down. The focus is more on real wages than on nominal wages, and resilience comes from the productivity-enhancing effects of higher wages rather than institutional or contractual factors.
TC again; What percentage of professional economists can provide quality feedback and comparable comparisons?
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