Working Paper: NBER ID: w1906
Authors: Lawrence F. Katz
Abstract: This paper surveys recent developments in the literature on efficiency wage theories of unemployment. Efficiency wage models have in common the property that in equilibrium firms may find it profitable to pay wages in excess of market clearing. High wages can help reduce turnover, elicit worker effort, prevent worker collective action, and attract higher quality employees. Simple versions of efficiency wage models can explain normal involuntary unemployment,segmented labor markets, and wage differentials across firms and industries for workers with similar productive characteristics. Deferred payment schemes andother labor market bonding mechanisms appear to be able to solve some efficiency wage problems without resultant job rationing and involuntary unemployment. A wide variety of evidence on inter-industry wage differences is analyzed. Efficiency wage models appear useful in explaining the observed pattern of wage differentials.The models also provide several potential mechanisms for cyclical fluctuations in response to aggregate demand shocks.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher wages (J39) | increased productivity (O49) |
| higher wages (J39) | reduced turnover (J63) |
| higher wages (J39) | improved morale (I19) |
| higher wages (J39) | increased worker effort (J29) |
| increased productivity (O49) | reduced turnover (J63) |
| increased productivity (O49) | improved morale (I19) |
| higher wages (J39) | increased cost of job loss (J65) |
| increased cost of job loss (J65) | reduced shirking (J22) |
| firms' reluctance to lower wages (J31) | persistent involuntary unemployment (J64) |
| wage differentials (J31) | efficiency wage considerations (J33) |