Efficiency wages, insiders-outsiders and wages determination: theories and evidence

ABSTRACT The article discusses alternative explanations for the rigidity of real wages in the presence of involuntary unemployment. It is argued that real wage rigidity can be viewed as the result of two factors: (i) trade unions’ bargaining power, in the form of insider power; and (ii) the deliberate action of firms which try to avoid the costs associated with labour turnover. The article also presents recent empirical evidence on the importance of insider factors in the process of wage determination for a number of countries.