What is so important about efficiency wages?
This dissertation investigates some of the ways efficiency wages are important to both the U.S. economy and research in economics. The first section develops a model to investigate the likely effects of the decline of references in the United States. Survey data and anecdotal evidence makes it clear that firms are providing fewer bad references today then they did twenty five years ago. This is due to a perception that either the magnitude or the frequency of defamation suits has increased dramatically. The model shows that firms may use references as an incentive for employees to work productively. When lawsuits drive up the costs of providing references, the analysis shows that firms will use efficiency wages as a substitute for references. This causes the natural rate of unemployment to increase, especially in industries where the firms have relatively worse monitoring difficulties. These predictions, and thus the existence of efficiency wages, are validated by empirical evidence th
