Comparisons in Economic Thought: Economic interdependency reconsidered (Routledge Studies in the History of Economics) by Stavros A. Drakopoulos

Author:Stavros A. Drakopoulos [Drakopoulos, Stavros A.]
Language: eng
Format: azw3
ISBN: 9781317531555
Publisher: Taylor and Francis
Published: 2016-05-25T16:00:00+00:00

In equation (6.12), θ measures the effort put forth by the representative worker, x reflects workers “opportunities”, which depend both on wages paid by other firms and on unemployment, and α measures the productivity enhancing effects of paying higher wages (Summers, 1988: 384). This is combined with the idea that firms set an appropriate wage rate relative to other firms in their labour market. A firm’s profits may fall when wages are reduced, given that reducing wages influences productivity by affecting workers’ effort, or by raising the firm’s costs of recruiting, training and retaining its labour force.

Summers derives a simple equation indicating the market equilibrium unemployment rate:

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