Efficiency wages and inequality

Abstract

Since the seminal articles of Stiglitz (1974, 1976), Solow (1979, 1980), Akerlof (1982), Shapiro and Stiglitz (1984), Akerlof and Yellen (1985) and Summers (1988), efficiency wage approaches have been considered as providing a major explanation for involuntary unemployment. Whatever their economic and/or sociological driving mechanisms, efficiency wages create involuntary unemployment by generating wage rigidity because firms set a real wage that is higher than the market clearing wage.