We analyse the implications of habit formation relating to wages in a multi-period efficiency-wage model. If employees have such preferences, their existence provides firms with incentives to raise wages and reduce employment over time. Greater intensity does not necessarily have the same...

Many organizations nowadays combine profits with a social mission. This paper reveals a new hidden benefit of the mission: its role in facilitating the emergence of efficiency wages. We show that in a standard gift-exchange principals highly underestimate agents’ reciprocity and, thereby,...

We analyse the implications of habit formation relating to wages in a multi-period efficiency-wage model. If employees have such preferences, their existence provides firms with incentives to raise wages and reduce employment over time. Greater intensity does not necessarily have the same...

Purpose: This paper aims to explore the effects of fiscal policy in an economy with efficiency wages, consumption taxes and a common income tax rate. Design/methodology/approach: A dynamic general-equilibrium model with the government sector is calibrated to Bulgarian data (1999–2018). Two...

Interindustry wage differentials in wage regressions estimated for individuals have been interpreted as evidence consistent with efficiency wage models. A principal competing explanation is that these differentials are generated by differences across workers in unobserved ability. This paper...

This paper analyzes the ability of a general equilibrium efficiency wage model to account for the estimated response of hours worked and of real wages to a fiscal policy shock. Our key finding is that the model cannot do so unless we make the counterfactual assumption that marginal tax rates are...

In the most widely analyzed type of efficiency wage model of involuntary unemployment, firms pay wages in excess of market clearing to give workers an incentive not to shirk. Such payments in excess of market clearing and the resultant equilibrium unemployment act as a worker discipline device....

In a Cournot-oligopoly with free but costly entry and business stealing, output per firm is too low and the number of competitors excessive, assuming labor productivity to depend on the number of employees only or to be constant. However, a firm can raise the productivity of its workforce by...

In this paper we combine two important ingredients - search and matching frictions and "fair wages," and investigate their combined quantitative importance in explaining fluctuations in Bulgarian labor markets. Overall, the calibrated real-business-cycle model for Bulgaria after the introduction...

We analyze the behavior of plant-level real wages and productivity in Turkish manufacturing after the transition to democracy in 1987 and test whether wages under democracy causes productivity. The Turkish experience provides almost an experimental case: real wages in manufacturing increased by...

Efficiency wage models of the effort elicitation type have important implications for labor market dynamics. These models have a wide array of discontinuous sunspot equilibria driven by extraneous variables, in addition to well-behaved equilibria characterized by continuous, slowly adjusting...

The implications of (public or private) pre-play communication and information revelation in a labour relationship is not well understood. We address these implications theoretically and experimentally. In our baseline experiments, the employer offers a wage to the worker who may then accept or...

We explore the implications of trade liberalization in economies with State Owned enterprises (SOEs) and shirking. SOEs are modelled as controlled by the members of the enterprise who determine output and effort levels, while facing output prices and wage rates set by government. Enterprise...

While it is widely established that higher wages attract more productive individuals into teaching, it is unclear if salaries can be used to motivate existing teachers to work harder, or more productively, in any way that affects pupil outcomes. Using teachers' predicted relative wages,...

The gift exchange hypothesis postulates that workers reciprocate above market-clearing wages with above-minimum effort. This hypothesis has received mixed support in dyadic employer-worker relationships. We present a field-experimental test to assess this hypothesis in the context of a triadic...

We analyze the behavior of plant-level real wages and productivity in Turkish manufacturing after the transition to democracy in 1987 and test whether wages under democracy causes productivity. The Turkish experience provides almost an experimental case: real wages in manufacturing increased by...

Much recent thought has been devoted to the macroeconomic importance of the existence of wage contracts. Still, some puzzling features of the most conspicuous form of wage bargaining, that done formally by employers and labor unions, deserve further theoretical attention. Among these important...

This paper examines differences in pay for equally skilled workers indifferent industries. The major finding is that there is substantialdispersion in wages across industries, even after allowing for measured andunmeasured labor quality, working conditions, fringe benefits, transitorydemand...

Efficiency wage models have been criticized because worker malfeasance can be prevented in a pareto efficient manner by requiring workers to post a bond which they lose if they are caught cheating. However, since it is costly to monitor workers and costless to demand a larger bond, firms should...

This paper examines Henry Ford's introduction of the five-dollar day in 1914 in an effort to evaluate the relevance of efficiency wage theories of wage and employment determination. Our general conclusion is that the Ford experience is strongly supportive of the relevance of these theories....

We use a survey-based experiment to examine public support for minimum wages. We first elicit respondents' moral assessment of two labor market systems: one with a minimum wage and one without. We find that gender and political affiliation are the strongest predictors of moral assessments, where...

We study an important mechanism underlying employee referrals into informal low skilled jobs in developing countries. Employers can exploit social preferences between employee referees and potential workers to improve discipline. The profitability of using referrals increases with referee stakes...

Democratic countries with substantial inequality and where people believe that success depends on connections and luck induce political support for high tax rates and generous welfare states. Traditional wisdom is that such policies harm the economy, but there is not much evidence that countries...

This paper is a contribution to the debate on policy complementarity in relation to deregulation in the product and labour markets. We develop a model of dynamic efficiency wages and monopolistic competition. Whereas most of the literature points toward the gains associated to an increase in...

More progressive income taxes raise employment in models of imperfectly competitive labour markets. However, this prediction is not robust to modifications of the analytical structure. For example, in an efficiency wage setting, more progressive taxes reduce profits. This induces firms to exit...

We study employment, employee effort, wages and profit sharing when firms face stochastic revenue shocks and when base wages and profit shares are determined through negotiations. The negotiated profit share depends positively on the relative bargaining power of the trade union and it has...

This paper considers the optimal level of firm-specific training by taking into account the positive effect of training on the expected duration of workers' current employment. In the framework of an efficiency wage model, a short expected job tenure represents a disamenity that reduces the...

Efficiency wage theory predicts that the wage per unit of effort will be lower in intensively monitored sectors. This wage differential will increase in effort. Using employer-employee matched data from Ghana we provide evidence supporting this hypothesis

Many workers believe that personal contacts are crucial for obtaining jobs in high-wage sectors. On the other hand, firms in high-wage sectors report using employee referrals because they help provide screening and monitoring of new employees. This paper develops a matching model that can...

In a city where individuals endogenously choose their residential location, firms determine their spatial efficiency wage and a geographical red line beyond which they do not recruit workers. This is because workers experiencing longer commuting trips provide lower effort levels than those...

Conventional theory predicts that productivity gains lead to pay hikes. Pay increases, however, can influence labor productivity. But what about in a corporatist economy? Focusing on Germany, we use an innovative technique developed by Geweke to disentangle the relationship between pay and...

Like many transition economies, Slovenia is undergoing profound changes in the workings of the labor market with potentially greater flexibility in terms of both wage and employment adjustment. We investigate the impact of the changing labor market for Slovenia using unique longitudinal matched...

We report the results from a representative survey of human resource managers in 885 Swedish firms. We estimate that during the severe recession of the 1990s, only 1.1 percent of workers took a cut in regular nominal pay. We trace the lack of wage moderation to a combination of exogenous...

The design of optimal immigration policy, particularly in the face of the spiralling demand for highly skilled workers, such as IT workers and engineers, is a topical issue in the policy debate as well as the economic literature. In this paper, we present empirical evidence from firm level data...

Consider a labour market with heterogeneous workers. Firms recruit workers by fixing a hiring standard and a wage offer simultaneously. A more demanding hiring standard necessitates a better wage offer in order to attract enough qualified applicants. As a result, an efficiency wage effect is...

The impacts of introducing work requirements for welfare recipients are studied in an efficiency wage model. If the workfare package is not mandatory, it will reduce employment, profits, and utility levels of employed and unemployed workers. In contrast, mandatory effort requirements will...

To explain the rise in the college wage premium in developed economies in the past decades, the present paper examines the effects of technological progress on workers' effort incentives, which determine the effective labor supply. Five effort incentive effects of technological progress are...

In this paper we construct a stylised general equilibrium macromodel to show that demand led expansions may have unexpected effects when market imperfections lead to changes in labour productivity. We find some empirical support, from a number of European countries, for the main predictions of...

Conventional theory predicts that productivity gains lead to hikes in real pay. Efficiency wage theory hypothesizes that pay increases can lead to productivity improvements. But would such results be observed in a corporatist economy with centralized bargaining? For the case of Austria, a...

We explore the implications of trade liberalization in economies with State Owned enterprises (SOEs) and shirking. SOEs are modelled as controlled by the members of the enterprise who determine output and effort levels, while facing output prices and wage rates set by government. Enterprise...

We offer a unified framework to analyze the determination of employment, employee effort, wages, profit-sharing and capital structure when firms face stochastic revenue shocks. We apply a generalized Nash bargaining solution, which extends the wage bargaining literature by incorporating...

We develop a rationale for the payment by firms of a wage premium on marginal, or overtime, weekly hours. We examine wage-hours contracts within the framework of a two-period specific human capital model with asymmetric information. The wage premium serves to achieve contract efficiency. For...

In an efficiency wage economy with variable profits, a shift from payroll to employment taxes will reduce unemployment if the tax level is held constant at the initial wage. However, unemployment will rise if firms are constrained to zero profits in the long-run and if tax revenues are constant....

In order to alleviate unemployment it is often recommended to reduce social security contributions (SSC) and to compensate for the ensuing loss in revenues by a rise in the value-added tax (VAT). Assuming unemployment to be caused by efficiency wages, it is shown that a balanced-budget shift...

This paper uses efficiency wage theory and the existence of community-based sharing to hypothesize that labor markets in developing countries have multiple equilibria - the same economy can be stuck at different levels of unemployment with different levels of wages. The model is meant for...

We investigate the relationship between the slope of the wage-tenure profile and the level of monitoring across two cross sections of matched employer-employee British data. Our theoretical model predicts that increased monitoring leads to a decline in the slope of the wage-tenure profile. Our...