Evidence of efficiency wage payments in UK firm level panel data

Efficiency wage theories have been put forward as attractive ways of explaining different aspects of the labour market. To find direct evidence of efficiency wage payments has proven to be quite difficult. We model various vertical spillovers from wage determination in an upstream labour market to market share performance in a downstream product market and vice versa. We do this within Sutton''s (1991) general oligopoly model under alternative theories of the labour market. Rent sharing due to efficiency wages is shown to create only a downstream vertical spillover. While rent sharing due to wage bargaining creates a two way vertical spillover. The spillovers due to efficiency wage payments are shown to be the only downstream spillover that drives a positive relationship between a firm''s wage growth and product market performance. Using U.K. firm level panel data we constrain the data with our theory to pinpoint the downstream spillover due to efficiency wage payments. The spillover turns out to be significant and we claim this to be the first direct and general empirical evidence for efficiency wage payments.