Efficiency Wages, X-Efficiency, and Urban Unemployment

There is a basic asymmetry between returns to human and non human inputs. The essence of the asymmetry is that the wage can affect the efficiency of labour while the return to the owners of non human inputs, such as machines, buildings, or land, has no influence on the inputs’ physical contributions. This distinction has a number of implications — some of which will be examined in this paper. The implication to be considered is the possibility that the effect of the rate of return of an input, on efficiency, may imply a lower boundary below which the return to the input owner cannot go, and as a consequence this limits the effectiveness of such a variable as a means of clearing a market. For instance, if there is a minimum wage then it is possible for that labour market never to come into ‘equilibrium’ because the wage cannot get low enough to equate the demand and supply for labour. This is similar to the idea of the liquidity trap when there is a floor to the interest rate. ‘Efficiency wages’ can operate in a similar manner.