The efficiency wages perspective to wage rigidity in the open economy: a survey

Abstract

PurposeThe purpose of the paper was to establish the implications of globalisation for labour markets when efficiency wages create endogenous wage rigidity and to re‐examine the credibility of the arguments that call for deregulation, more wage flexibility and less social protection in this context.Design/methodology/approachThe role of efficiency wages is reviewed in the traditional international economics theory, new economic geography and the neo‐Schumpeterian perspective towards international competitiveness.FindingsFirst, taking into account endogenous sources of wage rigidity has different implications for employment, inequality, regional growth convergence and the role of the welfare state in the context of international competitiveness, from those derived when assuming them away or taking them as imposed by labour market institutions. Second, policies that would substantially reduce social security or lead to cost‐cuts may have an adverse effect on effort and thus on productivity.Originality/valueTo the author's knowledge, this paper is the only review in the literature that concentrates on efficiency wages applied in international trade.