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Efficiency Wage Hypothesis—The Case of Pakistan

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  • Syed Kanwar Abbas
  • Asad Zaman

    (International Institute of Islamic Economics, Islamabad.)

Abstract

The object of this paper is to present an exposition of Efficiency Wage theory, and to test its basic assertions in the context of Pakistan. The Great Depression of 1929 showed that labour disequilibrium persists for long periods of time. One of the causes of this was rigidity of nominal wages, which was assumed without explanation by Keynes in his General Theory. Stagflation in the 1970s led to re-examination of Keynesian theories and a search for a satisfactory theoretical explanation of wage rigidity. Efficiency Wage theories provide an explanation by suggesting that worker productivity increases with wage. This means that firms may not have incentive to cut wages even when they are above equilibrium. Substantial empirical evidence for efficiency wages has been found in the context of advanced economies, but there is very little literature for developingcountries. Saygili (1998) has given evidence for efficiency wages in the Turkish economy. Nasir (2000) provides empirical evidence for a wage differential between private and public sectors in Pakistan, which conforms to efficiency wage considerations. In this paper, we show that the textile sector in Pakistan appears to offer efficiency wages, while other sectors conform to neoclassical competitive labour market theorie

Suggested Citation

  • Syed Kanwar Abbas & Asad Zaman, 2005. "Efficiency Wage Hypothesis—The Case of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 44(4), pages 1051-1066.
    • Handle: RePEc:pid:journl:v:44:y:2005:i:4:p:1051-1066
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    References listed on IDEAS

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    Cited by:

    1. Muhammad Irfan, 2010. "A Review of the Labour Market Research at PIDE 1957-2009," PIDE Books, Pakistan Institute of Development Economics, number 2010:1 edited by Rashid Amjad & Aurangzeb A. Hashmi, December.
    2. Hasan, Syed Akif & Subhani, Muhammad Imtiaz & Osman, Ms. Amber, 2012. "Disparity in the structure of wages in Pakistan," MPRA Paper 37664, University Library of Munich, Germany.
    3. Mehmet Karacuka & Asad Zaman, 2012. "The empirical evidence against neoclassical utility theory: a review of the literature," International Journal of Pluralism and Economics Education, Inderscience Enterprises Ltd, vol. 3(4), pages 366-414.
    4. Ahmad Jafari Samimi, 2011. "Efficiency Wage Hypothesis: The Case Study of Iran's Manufacturing Industries," Journal of Social and Development Sciences, AMH International, vol. 1(5), pages 157-164.

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