Is there a Wage-Supervision Trade-Off? Efficiency Wages Evidence From the 1990 British Workplace Industrial Relations Survey

Abstract

Efficiency Wages cannot be ruled out on a priori theoretical grounds and evidence is needed. Direct evidence on the effects of wages on productivity and indirect evidence from the wage structure does not seem persuasive. In this paper we offer an indirect test of the efficiency wage theory, by testing the prediction of the ‘shirking’ and ‘gift-exchange’ models of efficiency wages of a wage-supervision trade-off, using data from the 1990 British Workplace Industrial Relations Survey. We highlight the main empirical problems that hinder the estimation of the wage-supervision relationship, and we offer a novel theoretical explanation of the wagesupervision trade-off in terms of union bargaining power. We find evidence that wages and supervision are substitutes in eliciting effort for unskilled manual workers. This evidence supports principal-agent models, many of which do not have the efficiency wage property. Finally, after we test whether wages are set optimally above the market clearing level we fail to find any evidence that can rule out efficiency wages in favour of incentive contracts.Efficiency Wages, Wage-supervision trade-off, Endogeneity bias, private and Non-Unionised establishments