A Direct Test Of The Efficiency Wage Model Using Uk Micro- Data
This paper presents evidence that firm-level productivity increases when either relative wages rise, or the level of unemployment rises. Both facts are consistent with the efficiency wage model. The link between relative wages and productivity may also be explicable by unobserved human capital, but this is unlikely as a variety of alternative controls leaves the size of this linkage largely unchanged. Moreover, the link between unemployment and productivity is more difficult to rationalize in terms of the unobserved human capital model. The authors results may also arise through rent-sharing, but an instrumental variables estimate suggests that this is unlikely to be important. Further, the authors results hold for union and non-union firms alike, which is harder to explain on the rent-sharing view. Copyright 1991 by Royal Economic Society.
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