The interaction between efficiency wage theories and labour turnover costs

    Research output: Contribution to journalArticlepeer-review


    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.
    Original languageEnglish
    Pages (from-to)203-208
    Number of pages6
    JournalBulletin of Economic Research
    Publication statusPublished - 1 Apr 2003


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