Entry Wages Signalling the Credibility of Future Wages: A Reinterpretation of the Turnover-Efficiency-Wage Model.

For both empirical and theoretical reasons, the mechanism by which existing efficiency-wage models link job rationing with turnover costs is unsatisfactory. This paper extends the standard turnover-efficiency-wage model by formally examining the determination of wages as the outcome of a self-enforcing contract. The problem is analyzed as a game of asymmetric information in which the entry level wage plays a signalling role about the credibility of the future wage payments. Suggestive evidence in favor of the model is provided by an examination of the restrictions imposed on wage profiles. For both empirical and theoretical reasons, the mechanism by which existing efficiency-wage models link job rationing with turnover costs is unsatisfactory. This paper extends the standard turnover-efficiency-wage model by formally examining the determination of wages as the outcome of a self-enforcing contract. The problem is analysed as a game of asymmetric information in which the entry level wage plays a signalling role about the credibility of the future wage payments. Suggestive evidence in favour of the model is provided by an examination of the restrictions imposed on wage profiles.