Claude Sonnet 3.5, economist

TC:

“Is the Stiglitz-Shapiro 1984 efficiency wage model actually a model of sticky wages, or not? Is either the real or nominal wage sticky in that model?”

Claude:

The Stiglitz-Shapiro efficiency wage model from 1984 is not primarily a model of sticky wages, although it can have implications for wage stickiness. Let’s break this down:

1. Core concept of the model: The Stiglitz-Shapiro model is fundamentally about explaining why firms might pay wages above the market-clearing level. The key insight is that higher wages can increase productivity by: a) Reducing shirking (as workers have more to lose if caught and fired) b) Lowering turnover costs c) Improving the quality of job applicants d) Boosting worker morale and effort
2. Wage stickiness in the model:

• The model does not directly predict sticky wages in the traditional sense of wages that are slow to adjust to economic shocks.
• However, it does provide a rationale for why wages might not fall even in the face of unemployment. Firms have an incentive to maintain higher wages to preserve the productivity benefits.

3. Real vs. Nominal wages:

• The model is primarily concerned with real wages, not nominal wages.
• The efficiency wage is set in real terms, as it’s the purchasing power of the wage that affects worker behavior and productivity.

4. Implications for wage rigidity:

• While not a model of sticky wages per se, the efficiency wage concept can contribute to wage rigidity.
• Firms may be reluctant to cut real wages even during economic downturns because doing so could reduce productivity more than it saves on labor costs.

5. Difference from traditional sticky wage models:

• Traditional sticky wage models often focus on nominal rigidities due to factors like long-term contracts or menu costs.
• The Stiglitz-Shapiro model provides a real, microeconomic foundation for why wages might not adjust downward, even if they’re not formally “sticky.”

In summary, while the Stiglitz-Shapiro efficiency wage model is not explicitly a model of sticky wages, it does provide insights into why wages might be rigid, particularly in the downward direction. The focus is on real wages rather than nominal wages, and the rigidity emerges from the productivity-enhancing effects of higher wages rather than from institutional or contractual factors.

TC again; What percentage of professional economists could give an answer of comparable quality and nuance?