ABSTRACT
Standard neoclassical theory predicts that higher real wage rates result in less employment and a lower rate of employment growth than would otherwise exist with lower real wage rates. In effect, higher wage rates and other labor costs serve to pressure the firm hierarchy into reorganizing production so that the utility-maximizing effort input by the firm's economic agents increases toward competitive levels, always assuming, of course, that one begins with the existence of x-inefficiency. This holds true if one assumes a zero growth economy, and also if one allows for the impact that increased wage rates might have on the rate of employment growth over time. This chapter introduces some flexibility in the firm's choice of factor inputs and the product prices that are assumed to change in response to changes in output induced by changes in wage rates.
