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Are Wages Too Low? Empirical Implications of Efficiency Wage Models

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  • Thomas J. Carter
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    Abstract

    Firms may pay efficiency wages to enhance productivity. The conventional presumption is that efficiency wages are inefficiently high because they lead to unemployment that is also inefficiently high; government policies that lower wages raise output. Using a simple and general efficiency wage model, this paper finds a necessary and sufficient condition for the opposite conclusion. If the condition holds, wages are inefficiently low, leading to productivity that is also inefficiently low. It is the high-wage policies that raise output, even if they also lower employment. Published empirical results support the condition. No evidence is found for the conventional presumption.

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    Bibliographic Info

    Article provided by Southern Economic Association in its journal Southern Economic Journal.

    Volume (Year): 65 (1999)
    Issue (Month): 3 (January)
    Pages: 594-602

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    Handle: RePEc:sej:ancoec:v:65:3:y:1999:p:594-602

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    Web page: http://www.southerneconomic.org/
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    Cited by:
    1. Carter, Thomas J., 2005. "Money and efficiency wages: the neglected effect of employment on efficiency," The Journal of Socio-Economics, Elsevier, vol. 34(2), pages 199-209, March.

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