5) Lapides rounds out his discussion of the early literature on wage theory
with a chapter on the early radical and social critics of political economy.
Efficiency wage theory
holds that a higher wage also results in greater worker efficiency in a modern, developed economy, but for different reasons.
Krueger and Summers suggest that their results provide support for the efficiency wage theory
by indicating a link between wage premiums and increased work effort.
The great strength of the efficiency wage theory
is that it provides one conceivable explanation for why, even under perfectly flexible wages, people may be unemployed even though they would prefer to do the jobs of the current job-holders at less than the prevailing wage.
While most previous economists have considered efficiency wage theory
to be a theory of real wage rigidity, a model was developed in Section IV demonstrating that if workers respond more quickly to changes in their own wage in deciding whether to quit, then nominal wages can be rigid in an efficiency wage model.
The formulation of the efficiency wage theory
that has received the most attention over the years, however, has been the one that has focused on problems of incentives.
Efficiency wage theory
offers an explanation for wage dispersion and for dual labor markets: the "wage-productivity nexus" is more important in some sectors of the economy than in others.
Principles and Methods of Industrial Peace reflects Marshallian wage theory
but includes an extended discussion of a bargaining model of wage outcomes influenced strongly by Edgeworth.
The efficiency wage theory
has in recent years generally been regarded as a powerful vehicle for explaining why involuntary unemployment has persisted in the labor market.
Based on these tenets, the efficiency wage theory
can answer the questions why the wage may exceed the market-clearing level and why involuntary unemployment is persistent.
One of the most influential models of wage-setting in low-income countries, nutrition efficiency wage theory
, makes a very strong assumption about employers' information set.
The basic puzzle that efficiency wage theory
is designed to solve is why wages appear to be rigid in the face of apparently unexploited gains from trade between firms and unemployed workers.