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A Theory of Quality Wages

A Study in the Interaction between Labor Markets and Output Markets

Series:

Eva Pichler

The Theory of Quality Wages contributes to the understanding of the observed pattern of the interindustry wage structure and of unemployment. Basically, it is a modification of the efficiency wage theory grounded on an essential feature of modern manufacturing firms. The basic quality wage hypothesis states that in order to produce improved quality, better (and not more) workers are needed. From this simple specification it immediately follows that firms with a higher degree of market power and capital-intensive firms pay higher wages. Moreover, by predicting above market clearing wages, the model yields an explanation of unvoluntary unemployment.
Contents: Producing improved quality, better workers (and not more workers) are necessary - Firms with more market power and capital-intensive firms pay higher wages - Explanation of unvoluntary unemployment.