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Efficiency Wage Hypothesis—The Case of Pakistan

  • Syed Kanwar Abbas
  • Asad Zaman

    (International Institute of Islamic Economics, Islamabad.)

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

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Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 44 (2005)
Issue (Month): 4 ()
Pages: 1051-1066

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Handle: RePEc:pid:journl:v:44:y:2005:i:4:p:1051-1066
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  1. Zafar Mueen Nasir, 2000. "Earnings Differential between Public and Private Sectors in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 39(2), pages 111-130.
  2. Akerlof, George A, 1984. "Gift Exchange and Efficiency-Wage Theory: Four Views," American Economic Review, American Economic Association, vol. 74(2), pages 79-83, May.
  3. Huang, Tzu-Ling & Hallam, Arne & Orazem, Peter & Paterno, Elizabeth M., 1998. "Empirical Tests of Efficiency Wage Models," Staff General Research Papers 1325, Iowa State University, Department of Economics.
  4. Huang, Tzu-Ling, et al, 1998. "Empirical Tests of Efficiency Wage Models," Economica, London School of Economics and Political Science, vol. 65(257), pages 125-43, February.
  5. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
  6. repec:tpr:qjecon:v:105:y:1990:i:2:p:255-83 is not listed on IDEAS
  7. Levine, David I, 1992. "Can Wage Increases Pay for Themselves? Tests with a Production Function," Economic Journal, Royal Economic Society, vol. 102(414), pages 1102-15, September.
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