Effort, Wages, and the International Division of Labor

Abstract

This paper embeds variable effort into a traditional two‐sector Heckscher‐Ohlin model of international competition. Effort enters a production function as total factor productivity, and on the assumption that effort does not affect capital depreciation, the capital cost savings from high‐effort operations are passed on to workers. The labor market thus offers a set of contracts with higher wages compensating for higher effort. This has implications for growth, openness, minimum wages, collective bargaining, public support of education, efficiency of state enterprises, the distribution of wealth, childbearing, and much more.