Skip to main content
Article thumbnail
Location of Repository

Efficiency wages and the economic effects of the minimum wage: evidence from a low-wage labour market

By Andreas Georgiadis


We exploit a natural experiment provided by the 1990 introduction of the UK National Minimum Wage (NMW) to investigate the relationship between wages and monitoring and to test for Efficiency Wages considerations in a low-wage sector, the UK residential care homes industry. Our findings seem to support the wage-supervision trade-off prediction of the shirking model, and that employers didn't dissipate minimum wage rents by increasing work intensity or effort requirements on the job. Estimation results suggest that higher wage costs were more than offset by lower monitoring costs, and thus the overall evidence imply that the NMW may have operated as an Efficiency Wage. These findings support Efficiency Wage models used to explain a non-negative employment effect of the Minimum Wage and provide an explanation of recent evidence from the care homes sector that although the wage structure was heavily affected by the NMW introduction, there were moderate employment effects

Topics: HD Industries. Land use. Labor
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Year: 2008
OAI identifier:
Provided by: LSE Research Online

Suggested articles


  1. 1995.“The Consequences of Minimum Wage Laws; Some New Theoretical Ideas.” doi
  2. (1997). A Simple Test of the Shirking Model”, Centre of Economic Performance Discussion Paper,
  3. (1986). A Theory of Dual Labor Markets with Applications to Industrial Policy, Discrimination, and Keynesian Unemployment”, doi
  4. (1991). and K.Chauvin doi
  5. (1985). Are Efficiency Wages Efficient”, NBER Working Paper, doi
  6. (1994). Bosses of Different Stripes: A Cross-National Perspective on Monitoring and Supervision.” American Economic Review Papers and Proceedings,
  7. (1985). Can Unemployment be Involuntary?:
  8. (1992). Can Wage Increases Pay for Themselves:Tests with a Production Function.” doi
  9. (1987). Carrots and Sticks: Pay, Supervision, doi
  10. (1993). Does Fainess Prevent Market Clearing? An Experimental Investigation.”, doi
  11. (2002). Econometric Analysis of Cross Section and Panel Data. doi
  12. (1987). Efficiency Wage Models of Unemployment: A Survey.” Working Paper,
  13. (2003). Efficiency Wage, Neoclassical and Non-Neoclassical Evidence."
  14. (2006). Efficiency Wages in Low-Wage Labour Markets and the Economic Effects of the Minimum Wage", Ph.D thesis, doi
  15. (1991). Efficiency Wages Models of Unemployment, Layoffs and Wage Dispersion. doi
  16. (1984). Equilibrium Unemployment as a Worker Discipline Device.” doi
  17. (1995). Is there a trade-off between supervision and wages? An empirical doi
  18. (1980). Job Queues and Layoffs in Labour Markets with Flexible Wages.” doi
  19. (1982). Labor Contracts as Partial Gift-Exchange.” doi
  20. Lawrence Katz and Alan Krueger.1991. “Job Queues and Wages.” doi
  21. (1994). Minimum Wages and Employment: A Case Study of the Fast-Food Industry In doi
  22. (2004). Minimum Wages in a Low-Wage Labour Market: Care Homes in doi
  23. (1995). Myth and Measurement: The New Economics of the Minimum Wage. doi
  24. (1991). Ownership, Agency, and Wages: An Examination of Franchising in the Fast Food Industry.” doi
  25. (1963). Personnel Policy: Issues and Practices.
  26. (2006). Putting Behavioral Economics to Work: Testing For Gift Exchange in Labor Markets Using Field Experiments.”, doi
  27. (2001). The Consequences of Minimum Wage Laws: Some Theoretical Ideas Revisited.” doi
  28. (2004). The Impact of the National Minimum Wage on the Pay Distribution, doi
  29. (1995). The Relationship between Supervision and Pay: Evidence from the British New Earnings Survey” doi
  30. (1990). The structure of supervision and pay in hospitals.” doi
  31. (1999). Wage Rigidity in a Competitive Incomplete Contract Market.”, doi
  32. (2003). Where the Minimum Wage Bites Hard: Introduction of Minimum Wages to a Low Wage Sector.” doi
  33. (1990). Who Bosses Whom?
  34. (1988). working conditions, and the employer size-wage effect.”

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.