Efficiency Wages: Signals or Incentives An Empirical Study of the Relationship between Wage and Commitment

Efficiency wage theories arguethat firms induce their employees to work in a moredisciplined way by paying high wages. Two basicmechanisms have been pointed out in economics about how these wage premia motivate employees.The incentives-driven `shirking model' impliesthat employees who have a highly paid job workin a more disciplined way so as to avoid beingdismissed. The ``gift exchange' model is basedon the assumption that high wages change therelationship between employer and employee.Empirical evidence on the incentives approachis mixed and a thorough competitive testingagainst the gift exchange model was notpossible due to the fact that the latter wasnot worked out enough. However, there is a relational theory of efficiency wages which isworked out in detail in order to allow directcompetitive testing. This relationalsignaling approach, as it is called, is basedon framing effects and comes to specifichypotheses about the conditions under whichefficiency wages work. These hypothesescontrast sharply with predictions from theincentives approach. The paper presents anempirical test of the theories and shows thatthe data clearly reject the incentive-basedpredictions and confirm the relationalsignaling predictions.