Pure Wage Rent: The Theory

Abstract

Pure wage rent, defined as labor pricing that chronically exceeds market-opportunity cost, is an outcome of rational employer-employee interaction in information-challenged workplaces. It is an essential concept, integral to the analysis of important economic phenomena, consistent with available evidence, and rooted in neoclassical tenets of optimization and equilibrium. That PWR is absent from textbooks is indicative of a damaging gap in economic theory, which this paper remedies. The task was daunting, requiring the generalization of rational price-mediated exchange from the marketplace to workplaces restricted by costly, asymmetric information. Rigorous modeling of the second venue was expedited by earlier economic accounts of intra-firm behavior. Most notably, a detailed description of what goes on inside complex, bureaucratic workplaces was provided in the middle 20th century by a school of labor economists that Clark Kerr named “Neoclassical Revisionists”. (For background, see Kerr (1988), Lloyd Reynolds (1949), and Richard Lester (1951).) What follows translates the revisionists’ narrative into a rigorous theory rooted in optimizing behavior organized by general decision-rule equilibrium. The exercise microfounds pure wage rent, opening an exceptionally productive research frontier.