The determination of wages in socialist economies: some microfoundations

The authors address the issue of how wages are determined in socialist economies. They distinguish between different types of economic regimes, in terms of how much decentralization is permitted and how extensive are market-based features orrules. Wages are commonly assumed to be exogenously given in socialist systems, regardless of regime. They show that this assumption is not warranted, given the use of incentive-based systems in these economies. Both the classical planned economy and the partially reformed regime face the problem of motivating workers in the absence of monitoring and of such conventional penalties as unemployment. The authors show that in cooperative settings the outcome can be lower productivity than desired and that in noncooperative settings the outcome can be higher wages than warranted. They interpret the partially reformed socialist economy as an attmept to refine the motivational structure by introducing a manager between the planner and the workers. They also present a preliminary treatment of an economic regime such as the one that existed in Poland after January 1990, where market-based rules almost fully predominate. Their objective is to provide coherent foundations for wage equations that can be tested empirically. The authors show wages to be strongly associated with prices and rather less strongly associated with productivity.