Title: Wages, Employment and Futures Markets
Reference Number: 1186
Publication Date: August 2008
JEL Classifcation: D21, J31
Author(s):

Ariane Breitfelder
University of Munich

Udo Broll
Dresden University of Technology

Kit Pong Wong
The University of Hong Kong

Abstract:
This paper places the competitive firm under output price uncertainty in a standard efficiency wage model, wherein the work effort of labor depends on the wage rate set by the firm. Irrespective of the availability of a commodity futures market, we show that the Solow condition holds in that the equilibrium effort-wage elasticity is unity. The optimal wage rate is preference-free and independent of the underlying output price uncertainty under the efficiency wage hypothesis. Furthermore, we show that the introduction of the commodity futures market induces the firm to hire more labor and thereby produce more output if the firm is sufficiently risk averse.

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Last modified: 03/19/2009