Frontiers of Economics in China
In this general equilibrium model, firms engage in oligopolistic competition and choose increasing returns technologies to maximize profits. Capital and labor are the two factors of production. The existence of efficiency wages leads to unemployment. The model is able to explain some interesting observations of the labor market. First, even though there is neither long-term labor contract nor costs of wage adjustment, wage rigidity is an equilibrium phenomenon: an increase in the exogenous job separation rate, the size of the population, the cost of exerting effort, and the probability that shirking is detected will not change the equilibrium wage rate. Second, the equilibrium wage rate increases with the level of capital stock. Third, a higher level of capital stock does not necessarily reduce the unemployment rate. That is, there is no monotonic relationship between capital accumulation and the unemployment rate.
© 2014 Higher Education Press and Brill
Included with the kind written permission of the publishers.
Original Publication Citation
Zhou, H. (2015). The choice of technology and equilibrium wage rigidity. Frontiers of Economics in China, 10(2), 252-271. https://doi.org/10.3868/s060-004-015-0011-8
Zhou, Haiwen, "The Choice of Technology and Equilibrium Wage Rigidity" (2015). Economics Faculty Publications. 64.