1991•Economic InquiryRequires access

EFFICIENCY WAGES AND EQUILIBRIUM WAGES

Dan A. Black, John Garen

Abstract

We present a labor market model that allows as special cases a market paying equilibrium wages, one paying disequilibrium efficiency wages, and a market combining the two. Our analysis indicates that industrial wage differentials are not necessarily evidence of efficiency wages. Such differentials may be explained by differences across industries in labor performance standards or in the accuracy with which worker effort can be measured. We do find, however, that the relationship between wages and dismissals can be used to distinguish a market paying equilibrium wages from one paying efficiency wages.

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Key concepts: Economics, Efficiency wage, Disequilibrium, Wage, Real wages, Labour economics, Ophthalmology, Medicine