Technological Determinants of Non-Market Clearing Wages: Results from an Indonesian Survey

This paper uses survey data on 465 Indonesian manufacturing firms to test among three explanations for the payment of premium wages by large, foreign-owned, or modern firms: 1) Premia are market-clearing payments for higher-quality workers; 2) Premia are politically imposed on visible firms; 3) A relation between wages and worker productivity leads firms to set wages above market-clearing levels. The third, or efficiency wage, explanation implies a relation between the technological characteristics of the production process and the propensity to pay above market-clearing wages. Tests using a direct indicator of above market-clearing wages support both the efficiency wage and political explanations of wage determination.