Efficiency Wages Reconsidered: Theory and Evidence

Abstract

(No abstract) Differences in wages for observationally similar persons have interested economists at least since Smith, who devoted a chapter (I.X) to the problem. Smith identified five sources of wage inequality, of which the fourth is the ‘small or great trust which must be reposed in the workmen’. He argued that workers in jobs requiring greater trust (goldsmiths and jewellers were his examples) receive higher wages than ‘those of other workmen, not only of equal, but of much superior ingenuity’. Smith clearly envisioned that a type of agency problem was solved by paying higher wages, for he notes that this source of wage inequality is internalized ‘when a person employs his own stock in trade’.