Employment uncertainty and wage differentials. An efficiency wage model with workers′ on-the-job competition

Abstract

A simple efficiency wage model is used to study the impact of risks for layoffs on worker behaviour and wages. It is shown that, a wage difference will emerge for apparently identical labour when workers have different possibilities of self-protection against layoffs. Self-protection may take the form of investment in merits so as to improve one's ranking in the employer's order of lay-offs. The market for labour then becomes segmented into a high- and a low-wage sector due to differences in the weight of merits. Further, it is shown that under certain circumstances, high-paid jobs are rationed while low paid jobs are available to everyone. © 1990.