Compensation Structure and Establishment Quit and Fire Rates

Abstract

Despite the claims of efficiency wage theory, there is surprisingly little direct evidence that firms that pay higher wages have lower turnover rates than otherwise similar firms. This study uses data on 205 child care establishments to examine the influence of wages, fringe benefits, and the dispersion of wages within a skill class on establishment quit and fire rates. We separately examine one high‐skill group (teachers) and one lowskill group (teacher aides). While we find that wages (alone) significantly reduce establishment quit and fire rates, the effect seems too small to be consistent with the efficiency wage hypothesis.