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An Empirical Test of the Efficiency Wage Hypothesis

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  • Richard A. Parsons

    (Texa A&M Texarkana)

Abstract

The efficiency wage hypothesis is a popular explanation of observed labour market realities, however empirical testing has been very inadequate. Measuring effort and calculating productivity has been almost impossible in modern team oriented production processes. Because this study obtains a unique data set with similar production lines making the same product, across multiple geographies, but paying different wage premiums a reasonably controlled test can be conducted on the impact of wage premiums. Despite very good fitting of various production functions no statistical support is found for the idea that premium wages influence output. While these results may be somewhat surprising, given the popularity of the efficiency wage shirking model, there are possible alternative explanations discussed in this paper. As shown in this case study there is not always a connection between wage premium and output, therefore, managers should be careful about using wage premiums to increase effort and employee production.

Suggested Citation

  • Richard A. Parsons, 2013. "An Empirical Test of the Efficiency Wage Hypothesis," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 16(3), pages 369-387.
    • Handle: RePEc:ozl:journl:v:16:y:2013:i:3:p:369-387
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    References listed on IDEAS

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    1. Wadhwani, Sushil B & Wall, Martin, 1991. "A Direct Test of the Efficiency Wage Model Using UK Micro-data," Oxford Economic Papers, Oxford University Press, vol. 43(4), pages 529-548, October.
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    Cited by:

    1. Kevin Lang, 2020. "Effort and wages: Evidence from the payroll tax," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 53(1), pages 108-139, February.

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    More about this item

    JEL classification:

    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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