Labor Market and Wage Rigidity

This chapter discusses labor market dynamics from a macroeconomic perspective with an emphasis on the human dimension. It analyzes why wages are often downwardly rigid despite labor surpluses, drawing on the efficiency wage theory framework of Akerlof (1982) and Stiglitz (1974). The discussion continues with the role of labor unions in industrial relations, based on the seminal work of Freeman and Medoff (1984), which demonstrates that unions are not merely "wage cartels" but also a mechanism for collective voice that can enhance productivity. The analysis of minimum wage policy employs the empirical study by Card and Krueger (1994), which challenges conventional theory by showing that, in monopsonistic markets, an increase in the minimum wage can raise employment levels. Finally, this chapter examines labor market discrimination through the models of taste-based discrimination (Becker, 1957) and statistical discrimination (Arrow, 1973; Phelps, 1972), and evaluates the concept of Diversity, Equity, and Inclusion (DEI) as a business strategy proven to improve financial performance based on empirical data from McKinsey (Hunt et al., 2018). This chapter presents three data-driven visual elements: a diagram of the efficiency wage curve, a table of difference-in-differences results from the Card–Krueger study, and a correlation table of diversity–profitability from McKinsey research involving 1,007 companies across 12 countries.