Efficiency Wages and the Regulated Firm

This paper develops empirical tests of "efficiency-wage" hypotheses and applies these tests to data on a regulated firm. According to efficiency-wage theory, wage levels positively affect employee performance and, moreover, cost minimization requires that employers pay a wage premium above the supply price of labor. To explore these issues, we use company-level data to estimate production and quit functions that allow for efficiency-wage effects. Our empirical results support efficiency-wage theory: payment of a wage premium reduces the firm's quit rate, raises labor productivity, and lowers operating costs. These findings call into question the regulatory practice of disallowing labor expenses when the regulated firm's wage levels exceed market averages. Copyright 1997 by Kluwer Academic Publishers