Empirical Tests of Efficiency Wage Models

Abstract

Two‐digit manufacturing industry‐level production functions are used to test efficiency wage propositions. Conclusive tests require functional forms which allow differences in elasticities of substitution between observable human capital, wage premia and other inputs. Results demonstrate that unexplained industry wage premia and higher unemployment rates raise productivity. Wage premia and the human capital wage component cannot be aggregated into a single human capital index. Nevertheless, 88% of the productivity effect associated with industry wages can be tied to observable human capital in the industry, with only 12% associated with the wage premium.