The Carrot or the Stick? Competing Devices in the Management of the Labour Force

According to Efficiency Wage Theory, firms should devote resources to increase their workers' productivity either by allocating to employees efficiency wages or by using managerial staff in order to monitor workers. Drawing on the Shapiro-Stiglitz setting, we propose a theoretical model that combines both mechanisms. In this model, the representative firm faces a trade-off between increasing wages and raising its supervisory staff. One of our main theoretical results, is to highlight a negative relationship between unemployment and supervisory tasks because of the "labour disciplining" effect of unemployment. As unemployment increases, the fear of layoff also raises. As a consequence, workers stop shirking (ie. they do discipline themeselves). Firms can then allocate less resources to monitor workers, hence the lowering of the rate of supervisory staff. Relying on the Varieties of capitalism litterature, our empirical investigation goes one step further. More precisely, using cross sectional data for 50 economies, we show that in countries with non-flexible labour markets, an increase in the unemployment rate is negatively related to the rate of supervisory staff. By contrast, in economies characterized by flexible labour markets such an increase has either a non significant or a significantly positive effect on the rate of supervisory staff. Furthermore, whereas in latter economies, the only device that firms have at their disposal to manage the labour force is the "stick" (ie. supervisors who have monitoring tasks), in former ones, the "carrot" (ie. efficiency wages) is favoured