EFFICIENCY WAGES - COMBINING THE SHIRKING AND TURNOVER COST MODELS

This short paper attempts to combine the shirking and turnover cost mo dels into a composite model that captures the main features of each. O ur main result is that in equilibrium, the elasticity of effort with r espect to the wage will equal the elasticity of the average cost of la bour with respect to the wage. This is a generalisation of earlier mod els since this condition simplifies to the familiar Solow Condition if turnover is independent of the wage and simplifies to the condition t hat the wage is chosen to minimise the average cost of labour if shirk ing effects are absent. We provide an example that shows how the shirk ing and turnover cost models are complements rather than substitutes, since the impact on wages of one type of efficiency wage effect is str onger when the other type of efficiency wage effect is also present. ( C) 1997 Elsevier Science S.A.