Do competitive wages always have to be defined by marginal productivity? Can we have competitive wages which are not based on productivity, when the information is not perfect?

To put it in context, Suppose the firms doesn't want to pay the competitive wage because may be marginal productivity is too high (as few number of workers are able to enter the market due to high cost of education) or may be marginal productivity is too low (due to more hiring for some reason and firms believe that paying too low a wage will inhibit workers from contributing their optimum levels). We also assume that only worker know about their true productivity, firms induce efforts from the employees by paying them wages but we are still operating under competitive environment. Under such scenario, can industry agree upon a wage that's not based on marginal productivity. Are there any papers which look at competitive wages which are not based on marginal productivity and still no one is incentivized to deviate.

I apologise for this wide question. Any economics reference, where competitive wages not based on productivity, will be helpful.

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    $\begingroup$ Yes, the question is not very clear. So, do you mean relating wages with another measure? Or do you mean that wages may be above or below marginal product? $\endgroup$ – Papayapap Mar 13 at 17:50
  • $\begingroup$ @jmbejara, how can I do that? Is it "flag"? $\endgroup$ – Papayapap Mar 13 at 19:48
  • $\begingroup$ @Papayapap Sorry! I forgot that you need 500 reputation to cast close votes. You can use the flag feature when you want and you can just indicate that you think it should be closed. $\endgroup$ – jmbejara Mar 13 at 19:58
  • $\begingroup$ @jmbejara, thanks! I will not flag it though, if the question is edited to clarify, I would attempt an answer. $\endgroup$ – Papayapap Mar 13 at 20:02
  • $\begingroup$ @Papayapap I have tried to put the question in context. Hope it helps. Please let me know if it needs more clarification. Please help me with it. $\endgroup$ – Elina Gilbert Mar 14 at 9:30

Still, not 100% clear whether I get the question right, but in models with constant returns to scale and decreasing marginal productivity (question to others, are these conditions even necessary?), if firms are price takers in product and labor markets (no pricing power in which case you could look into monopsony models, see for instance the textbook "Monopsony in motion" by Alan Manning) and there is no imperfect information / search friction (in which case you could look at "Equilibrium Unemployment Theory" by Pissarides), wages will be equal to marginal product. This case is commonly referred to as competitive equilibrium.

The first part of your context implies that you are thinking about models where firms have monopsony power, because otherwise they would not be able to decide that wages are too high for them (for a minimally higher wage they would not be able to recruit any workers), while deciding that wages are too low is difficult to reconcile with a view that generally firms want to maximise profit and thus minimize labor costs. The second part of your context implies some kind of oligopoly model where firms collide on paying wages below equilibrium wage. I am not aware of studies formalizing this for the labor market, but probably there are.

  • $\begingroup$ Thank you everyone for your answers, especially @Papayapap, I should have mentioned imperfect information. I have edited the question. Can you please suggest me some references, really need it. I have already gone through paper by Pissarides $\endgroup$ – Elina Gilbert Mar 14 at 12:35
  • $\begingroup$ Now my answer doesn’t fit as well anymore. Also, it is even less clear to me under the current version of the question what you mean. Sorry, I can’t help you, I suggest you do some literature search yourself and then maybe update us what you found? $\endgroup$ – Papayapap Mar 14 at 13:40

Adding major details, such as information asymmetry to the question after answers are posted is poor form in my opinion. In case the original question is lacking - perhaps because too little time was spent considering it - a new question should be posted.

If the firms make an agreement to pay lower wages then by definition they are not competing, so what they are paying is not a competitive wage.

Productivity determines labor demand, and in a competitive labor market wages are set by demand and supply.

In case of imperfect information a lot depends on the details, but if an equilibrium exists usually the same logic holds, but with expected productivity instead of productivity.


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