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The Interaction Between Efficiency Wage Theories and Labour Turnover Costs
Author(s) -
Toulemonde Eric
Publication year - 2003
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/1467-8586.00170
Subject(s) - efficiency wage , insider , productivity , economics , labour economics , wage , turnover , macroeconomics , management , political science , law
We develop a simple model to illustrate how the effects of turnover costs on wages can be reinforced by an efficiency wage effect. The insider–outsider theory explains why labour turnover costs allow the insiders to earn higher wages than outsiders. According to the efficiency wage theory, higher wages enhance the insiders’ productivity. Therefore, the costs of replacing an insider by a low–paid, low–productivity outsider are increased, which allows the insiders to raise their wages further. Again, higher wages increase insiders’ productivity, which allows them to earn still higher wages, and so on. Thus, the existence of a link between effort and wages can reinforce the effects of labour turnover costs on wages.