Persistent Wage Inequality as Another Worker Discipline Device

The Institute of Economics will hold the next meeting of its Seminar Series on Tuesday, September 5, 2017: Gilberto Tadeu Lima, from the University of Sao Paulo (Brazil), will present the paper "Persistent Wage Inequality as Another Worker Discipline Device".

Abstract:

Motivated by considerable experimental and empirical evidence on persistent inter- and intra- industry wage differentials and endogenous labor effort, we set forth an evolutionary extension of the shirking version of the efficiency wage model featuring the possibility of heterogeneous behavior by firms as regards employee compensation. We allow for the possibility that in a given short run some firms choose not to follow the wage-setting or efficiency-wage compensation strategy and instead follow what we dub wage-taking compensation strategy. The wage taken as given by wage-taking firms (and hence the alternative wage taken as given by efficiency-wage firms) is not exogenous, though. Instead, it varies endogenously with the frequency distribution of wage compensation strategies across firms, which in turn is evolutionarily time-varying. While the wage compensation strategy played by a firm is predetermined in a given short run, there is strategy revision across short runs as guided by an evolutionary protocol. This allows us to explore whether both wage compensation strategies will survive in the long-run, evolutionary equilibrium. The issue arises as to whether it is logically possible the emergence of heterogeneity in wage compensation strategies (and therefore in wage and employment levels) across firms in the long-run equilibrium. Or, to paraphrase the title of the paper by Shapiro and Stiglitz (1984) developing the shirking version of the efficiency wage model, can persistent heterogeneity in wage compensation strategies (and the resulting persistent wage and employment differentials) across firms substitute for equilibrium unemployment as another worker discipline device? The answer is yes. In fact, while in Shapiro and Stiglitz (1984) unemployment and perfect monitoring of workers are substitute discipline devices, we show that wage (and employment) differentials across firms and perfect monitoring of workers can likewise be substitute discipline devices. In Shapiro and Stiglitz (1984) unemployment is a worker discipline device across homogeneously behaving firms by yielding a strictly positive expected cost of job loss. In our model, meanwhile, wage and employment differentials across heterogeneously behaving firms can act as worker discipline device when there is full employment by yielding a strictly positive expected cost of wage income loss. While the frequency distribution of wage compensation strategies across firms is predetermined in a given short run, it is endogenously time-varying as driven by evolutionary dynamics. Firms’ choice of wage compensation strategy to be played in a given short run is based on net expected payoffs under conditions of limited and localized information concerning the system as a whole. We devise evolutionary microdynamics of choice of wage compensation strategy that, by interacting with the coupled dynamics of wage, employment and output at the firm, segment and aggregate levels, determines the coevolution of the frequency distribution of wage compensation strategies and the extent of any resulting inequality in wage, employment and output across firms. As a result of evolutionary dynamics driving the revisable choice of wage compensation strategy by firms, our model may feature what we dub strategic segmentation (or dualism) as either a temporary or persistent or even permanent outcome. It is this evolutionarily time-varying strategic segmentation that it is at the origin of the wage and employment inequality across firms eventually generated by the model.