What is so important about efficiency wages?

Miles Brian Cahill, Purdue University

Abstract

This dissertation investigates some of the ways efficiency wages are important to both the U.S. economy and research in economics. The first section develops a model to investigate the likely effects of the decline of references in the United States. Survey data and anecdotal evidence makes it clear that firms are providing fewer bad references today then they did twenty five years ago. This is due to a perception that either the magnitude or the frequency of defamation suits has increased dramatically. The model shows that firms may use references as an incentive for employees to work productively. When lawsuits drive up the costs of providing references, the analysis shows that firms will use efficiency wages as a substitute for references. This causes the natural rate of unemployment to increase, especially in industries where the firms have relatively worse monitoring difficulties. These predictions, and thus the existence of efficiency wages, are validated by empirical evidence that shows that there has been a significant correlation between the change in industry-specific unemployment levels, and a measure of the difficulty firms have in monitoring their employees. The final part of this study examines how efficiency wages and matching difficulties interact in the labor market. A model with both efficiency wage and matching features is developed so that the individual matching and efficiency wage components can be isolated. Comparisons are made using analytical techniques and numerical examples. This analysis shows how models that use either efficiency wages or costly matching to drive unemployment are likely to have biased parameters when both efficiency wages and matching concerns are present in the economy. This parameter bias is particularly harmful in dynamic models of the economy. Overall, these two studies show that efficiency wages play an important role in the economy, and have important implications for theoretical research.

Degree

Ph.D.

Advisors

Barron, Purdue University.

Subject Area

Labor economics|Economic theory

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