The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Efficiency Wages

  • Andrew Weiss
Reference work entry


Efficiency wages capture the effect of compensation on the behaviour of workers, as well as on the quality of workers attracted and retained by the firm. This effect has greater significance in some areas than others, and can be used to explain wage differentials among firms and industries, as well as to explain why firms respond to demand shocks by reducing their labour force rather than cutting wages, and may ration jobs even in normal times. At the macroeconomic level efficiency wages can explain persistent long-term unemployment as an equilibrium outcome in a competitive labour market.


Capital cost Capital market imperfections Efficiency wages Firm size Firm-specific human capital Gift exchange Involuntary unemployment Labour supply Layoffs Low-wage probation period Monitoring Nutrition models Productivity Retirement Sorting effect of wages Wage differentials 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Andrew Weiss
    • 1
  1. 1.