Efficiency Wage Models of Unemployment: A Second View.

Efficiency wage models, in which firms find it profitable to pay wages above workers' reservation wages, provide a promising explanation for unemployment and interindustry wage differentials. One criticism of such models is that they imply firms should sell jobs by requiring up-front bonds from new workers. However, only some efficiency wage models imply this. Moreover, firms might not require bonds for many reasons. The authors show that moral hazard and adverse selection models together explain many labor market phenomena. The efficiency wage model conforms well to empirical findings, but certain anomalies suggest the need to consider rent-sharing models. Copyright 1990 by Oxford University Press.