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Efficiency Wage Models of Unemployment: A Second View


  • Lang, Kevin
  • Kahn, Shulamit


Efficiency wage models, in which firms find it profitable to pay wages above workers' reservation wages, provide a promising explanation for unemployment and interindustry wage differentials. One criticism of such models is that they imply firms should sell jobs by requiring up-front bonds from new workers. However, only some efficiency wage models imply this. Moreover, firms might not require bonds for many reasons. The authors show that moral hazard and adverse selection models together explain many labor market phenomena. The efficiency wage model conforms well to empirical findings, but certain anomalies suggest the need to consider rent-sharing models. Copyright 1990 by Oxford University Press.

Suggested Citation

  • Lang, Kevin & Kahn, Shulamit, 1990. "Efficiency Wage Models of Unemployment: A Second View," Economic Inquiry, Western Economic Association International, vol. 28(2), pages 296-306, April.
  • Handle: RePEc:oup:ecinqu:v:28:y:1990:i:2:p:296-306

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    References listed on IDEAS

    1. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
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    Cited by:

    1. Riveros, Luis A. & Bouton, Lawrence, 1991. "Efficiency wage theory, labormarkets, and adjustment," Policy Research Working Paper Series 731, The World Bank.
    2. William T. Dickens & Kevin Lang, 1992. "Labor Market Segmentation Theory: Reconsidering the Evidence," NBER Working Papers 4087, National Bureau of Economic Research, Inc.
    3. Cairns, Robert D. & Liston-Heyes, Catherine, 1996. "Competition and regulation in the taxi industry," Journal of Public Economics, Elsevier, vol. 59(1), pages 1-15, January.
    4. Franz, Wolfgang, 1993. "Unvollkommene Arbeitsmärkte in makroökonomischen Modellen: Eine Übersicht," Discussion Papers 1, University of Konstanz, Center for International Labor Economics (CILE).
    5. Peiwen Bai & Wenli Cheng, 2014. "Relative Earnings and Firm Performance: Evidence from Publicly-listed Firms in China, 2005-2012," Monash Economics Working Papers 51-14, Monash University, Department of Economics.
    6. Wen-Ya Chang & Ching-Chong Lai, 1999. "Efficiency wages and the balanced budget theorem," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 27(3), pages 314-324, September.
    7. Michael P. Keane, 1993. "Individual Heterogeneity and Interindustry Wage Differentials," Journal of Human Resources, University of Wisconsin Press, vol. 28(1), pages 134-161.
    8. VILHUBERT, Lars, 1999. "Wage Flexibility and Contract Structure in Germany," Cahiers de recherche 9905, Universite de Montreal, Departement de sciences economiques.
    9. Wang, Ruqu, 1997. "Competition, Wage Commitments, and Application Fees," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages 124-142, January.
    10. Steven G. Allen, 1994. "Updated Notes on the Interindustry Wage Structure," NBER Working Papers 4664, National Bureau of Economic Research, Inc.

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