Efficiency Wages and Labor Mobility in an Open Economy
IMF Working Papers, October 1, 1993
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- Efficiency Wages and Labor Mobility in an Open Economy
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Bibliographic details
- Authors: Julio A. Santaella, Pierre-Richard Agénor
- Published: October 1, 1993
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451850161.001
Summary
- The paper analyzes the role of labor market segmentation and relative wage rigidity in the transmission process of macroeconomic shocks in a two-sector optimizing model of a small open economy.
- The analysis is first conducted in the context of perfect intersectoral labor mobility.
- The discussion is then extended to consider the existence of short-run constraints on labor movements.
- The results highlight the role of efficiency considerations in the behavior of sectoral wages.
- A deflationary policy induces a reallocation of labor across sectors, but has no long-run effect on the unemployment rate.
Model structure and scenarios analyzed
- Two-sector optimizing model of a small open economy.
- Scenario 1: Perfect intersectoral labor mobility.
- Scenario 2: Short-run constraints on labor movements (labor market segmentation).
Key findings and mechanisms
- Labor market segmentation and relative wage rigidity are central to how macroeconomic shocks are transmitted across sectors.
- Efficiency considerations play a crucial role in sectoral wage behavior.
- Deflationary policy:
- Induces a reallocation of labor across sectors.
- Has no long-run effect on the unemployment rate.
Policy implications and interpretation
- Relative wage rigidity and segmentation shape short-run sectoral adjustments to macro shocks.
- Policies inducing deflationary conditions may change sectoral employment shares but are not expected to alter the long-run unemployment rate in the model framework presented.