Efficiency Wage Theories: a Partial Evaluation

62 Pages Posted: 29 Dec 2000 Last revised: 18 Sep 2010

See all articles by Lawrence F. Katz

Lawrence F. Katz

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 1986


This paper surveys recent developments in the literature on efficiency wage theories of unemployment. Efficiency wage models have in common the property that in equilibrium firms may find it profitable to pay wages in excess of market clearing. High wages can help reduce turnover, elicit worker effort, prevent worker collective action, and attract higher quality employees. Simple versions of efficiency wage models can explain normal involuntary unemployment,segmented labor markets, and wage differentials across firms and industries for workers with similar productive characteristics. Deferred payment schemes andother labor market bonding mechanisms appear to be able to solve some efficiency wage problems without resultant job rationing and involuntary unemployment. A wide variety of evidence on inter-industry wage differences is analyzed. Efficiency wage models appear useful in explaining the observed pattern of wage differentials.The models also provide several potential mechanisms for cyclical fluctuations in response to aggregate demand shocks.

Suggested Citation

Katz, Lawrence F., Efficiency Wage Theories: a Partial Evaluation (April 1986). NBER Working Paper No. w1906, Available at SSRN: https://ssrn.com/abstract=248591

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