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Entry Wages Signalling the Credibility of Future Wages: A Reinterpretation of the Turnover-Efficiency-Wage Model

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  • Paul Beaudry

Abstract

For both empirical and theoretical reasons, the mechanism by which existing efficiency-wage models link job rationing with turnover costs is unsatisfactory. This paper extends the standard turnover-efficiency-wage model by formally examining the determination of wages as the outcome of a self-enforcing contract. The problem is analyzed as a game of asymmetric information in which the entry level wage plays a signalling role about the credibility of the future wage payments. Suggestive evidence in favor of the model is provided by an examination of the restrictions imposed on wage profiles. For both empirical and theoretical reasons, the mechanism by which existing efficiency-wage models link job rationing with turnover costs is unsatisfactory. This paper extends the standard turnover-efficiency-wage model by formally examining the determination of wages as the outcome of a self-enforcing contract. The problem is analysed as a game of asymmetric information in which the entry level wage plays a signalling role about the credibility of the future wage payments. Suggestive evidence in favour of the model is provided by an examination of the restrictions imposed on wage profiles.

Suggested Citation

  • Paul Beaudry, 1994. "Entry Wages Signalling the Credibility of Future Wages: A Reinterpretation of the Turnover-Efficiency-Wage Model," Canadian Journal of Economics, Canadian Economics Association, vol. 27(4), pages 884-902, November.
    • Handle: RePEc:cje:issued:v:27:y:1994:i:4:p:884-902
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    Cited by:

    1. Francois, Patrick & van Ours, Jan C., 2000. "Gender Wage Differentials in a Competitive Labor Market: The Household Interaction Effect," IZA Discussion Papers 202, Institute of Labor Economics (IZA).
    2. Campbell, Benjamin A., 2003. "Firm Volatility and Stock Option Incidence," Institute for Research on Labor and Employment, Working Paper Series qt7gt1r0pn, Institute of Industrial Relations, UC Berkeley.
    3. Vahey, Shaun P., 2004. "Signalling ability to pay and rent sharing dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 28(11), pages 2327-2339, October.
    4. Orellano, Veronica I. F. & Picchetti, Paulo, 2005. "An Analysis of Quit and Dismissal Determinants between 1988 and 1999 using the Bivariate Probit Model," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 25(1), May.

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