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. This chapter explores that to the extent that x-inefficiency exists, higher wages “shock” a firm into producing more x-efficiently and, in effect, cause an upward shift in the firm’s marginal product of labor curve. The existence of x-inefficiency is placed in the context of standard economic definitions of economic efficiency and constrained optimization. The exogenous increases in the wage rate can be a determinate cause of higher labor productivity. The chapter explains why productivity can differ between otherwise identical firms, even if it can be argued that all economic agents of such firms are maximizing utility. The reduction in x-inefficiency takes place due to the pressure that the wage shocks places on the firm’s economic agents, especially members of the firm hierarchy.
