Efficient Bargains and the McDonald-Solow Conjecture

This article explores the McDonald and Solow (1981) conjecture that the outcome from a bargain over wages and employment can be approximately achieved by a bargain over wages and the labor-capital ratio (the "crew size"), where the latter can be argued to be more representative of the real world. I derive a crew size contract curve and show that this conjecture is not generally true. A test to determine which model is generating real-world data is suggested. The wage rigidity results derived by McDonald and Solow for their contract curve do not apply to this crew size contract curve.