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A direct test of efficiency wage theory: Evidence from the United States and other OECD countries
Abstract
Traditional wage theory predicts that employers maximize profits by hiring labor up to the point that real wages equal marginal productivity of labor. Increases in productivity will lead to increases in the real wages. Efficiency wage theory proposes that employers can structure wages to elicit greater effort from employees, implying therefore, that wages drive productivity. Both theories predict positive correlation between wages and productivity, but do not agree on the direction of causation. My application of Geweke's linear feedback method provides the framework for the first attempt to disentangle the relationship between wages and productivity. The wage to productivity feedback is evidence of efficiency wage theory; the productivity to wage feedback identifies traditional wage behavior. Other empirical studies of efficiency wage theory test corollaries to specific efficiency wage models, evaluate wage differentials, or measure the wage elasticity of output which provide circumstantial evidence of wage determination. I also use McGarvey's frequency decomposition to evaluate the linear feedback between wages and productivity over different time periods. These feedback measures show the magnitude, direction, and duration of the wage-productivity relationship, but do not confirm the sign of the feedback. For example, if wages lead productivity, an increase in wages could be leading an increase or a decrease in productivity. In an attempt to sign these feedback measures, I apply Sims' impulse response method. This technique illustrates how changes in wages (productivity) affect the time path of productivity (wages). I examine the wage-setting process in the U.S. manufacturing sectors using hourly compensation and output per hour. To gain a broader perspective I also analyze the U.S. business sectors. Evidence from the manufacturing and business sectors provide the basis for generalizations to be drawn about wage determination in the U.S. To gain an international perspective, I also investigate the wage-productivity relationship for several other OECD countries. Consistency in these results will provide evidence which identifies the roles of each type of wage behavior. A clear understanding of wage determination is crucial for theoretical and empirical studies and for policy considerations. These results will enhance empirical and theoretical investigations of labor markets.
Subject Area
Labor economics
Recommended Citation
Millea, Meghan Jo, "A direct test of efficiency wage theory: Evidence from the United States and other OECD countries" (1998). ETD collection for University of Nebraska-Lincoln. AAI9829528.
https://digitalcommons.unl.edu/dissertations/AAI9829528