DO EFFICIENCY WAGES EXPLAIN DISMISSALS

This study modifies Rebitzer's (1987) model of efficiency wages to pre dict dismissal from employment. Using a sample selection method and da ta from Australian workplaces, the analysis supports the predictions t hat both very high and very low levels of required effort, loose labou r markets and high dismissal costs are associated with fewer dismissal s. Among other results, we find that extensive internal labour markets and active unions reduce dismissals. The evidence suggests that large employers rely more heavily on dismissals to motivate employees, alth ough such employers screen more effectively and so exhibit lower dismi ssal rates (JEL J24, J41, J42).