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Efficiency Wages In efficiency wage models, firms choose to pay high wages to reduce turnover, eliminate shirking, increase morale, or in other ways enhance productivity. If wages exceed the market-clearing rates, unemployment results. Any further increase in wages, caused by some government policy, would likely worsen the unemployment problem but also further enhance productivity. Combining the two effects, would the wage increase raise or lower output and welfare? In other words, where and where not you would expect firms to pay efficiency wages? That is the question this paper seeks to answer. Economists typically assume that the efficiency wage is too high and so leads to unemployment that is also too high. Regarding a model of costly labor turnover, Stiglitz1 writes, firms are likely to pay too high wages. But it should be emphasized that it is possible that the competitive wage is too low. Since the 1970s, the persistently high unemployment rates...

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