Labor Turnover
On the labor turnover flavor of the efficiency wage hypothesis, firms also offer wages in excess of market-clearing (e.g. Salop 1979, Schlicht 1978, Stiglitz 1974), due to the high cost of replacing workers (search, recruitment, training costs). If all firms are identical, one possible equilibrium involves all firms paying a common wage rate above the market-clearing level, with involuntary unemployment serving to diminish turnover. These models can easily be adapted to explain dual labor markets: if low-skill, labor-intensive firms have lower turnover costs (as seems likely), there may be a split between a low-wage, low-effort, high-turnover sector and a high-wage, high effort, low-turnover sector. Again, more sophisticated employment contracts may solve the problem.
Read more about this topic: Efficiency Wage
Famous quotes containing the word labor:
“I count him a great man who inhabits a higher sphere of thought, into which other men rise with labor and difficulty; he has but to open his eyes to see things in a true light, and in large relations; whilst they must make painful corrections, and keep a vigilant eye on many sources of error.”
—Ralph Waldo Emerson (1803–1882)