A theory of wage determination : a training model with heterogeneous labour approach
This thesis offers an alternative approach to the theory of wage determination, producing new and interesting interpretations to labour market phenomena. Based on the assumption of heterogeneous labour, a training model based on the concept of adverse selection is introduced. The unique feature of this model is that the heterogeneity is expressed in terms of the cost of OJT as well as the opportunity wage of the potential workers. The model suggests that the existence of unemployment and the downward wage rigidity are conditional upon the market characteristics and that the unemployment can not be eliminated by lowering the wage. It also suggests that policies to control the demand side of the market such as accepting of immigration of able workers, raising the educational standard of the domestic workers, or subsidizing the firm's OJT would be more effective. Also as a training model, the analysis includes a two-period model, in which the upward-sloping wage profile is derived. The analysis is extended to the idea of multiple wage equilibrium in one market, which in turn offers a new dimension to the analysis of income distribution. One important result here is that whatever happens in the society will first affect the weakest, to whom therefore the policy makers need to pay greater attention. The derivation of a skewed distribution of wage offers yet one more explanation to the Pigou paradox. The model attempts also to explain how firms choose workers in the real world job offers usually states a minimum hiring standard as well as the offer wage, and how they react to economic fluctuations - would they, for example, reduce the wage or raise the minimum hiring standard when the demand for the product falls. The analysis suggests that the weaker members of the society are more prone to exogeneous shocks.