Interfirm, Interregional, and International Differences in Labor Productivity: Variations in the Levels of X-Inefficiency as a Function of Differential Labor Costs

Abstract

Economists have traditionally attempted to explain labor productivity differences between firms, regions, and nations by focusing upon differences in capital-labor ratios, differences in the quality of labor and capital, and differences in the quality and quantity of investments in human capital.¹ Richard R. Nelson (1968, 1984) broke with this tradition by arguing that differences in the technologies employed by firms at a given point in time should be incorporated into the analysis. Harvey Liebenstein (1980; 1987, chapter 4) argues that productivity differences between firms in the same industry and between countries at a similar stage of development can be explained to a large extent by the differences in motivational systems embodied by firms and countries. Differences in motivational systems affect the degree of X-inefficiency and thus the level of productivity in firms and countries.² Relative differences in wage rates and differential rates of change in wage rates are traditionally treated as variables that can affect labor productivity only by inducing changes in capital-labor ratios. In such a case, wage rates affect labor productivity differentials in the conventional way; through their impact upon factor inputs. Leibenstein, however, has suggested that increases in the price of labor can have an additional effect upon labor productivity. By increasing the pressure on the firm—higher wages increase unit costs—the higher wages induce the firm to reduce x-inefficiency and thereby increase labor productivity.³ Finally, Robert Solow (1986, pp. 41-44) has explicitly introduced wage rates into the production function in an attempt to explain wage stickiness in the face of diminished demand for output⁴ According to Solow, wage rates affect labor productivity by affecting the supply of labor effort per unit of time.