Are wages too low? Empirical implications of efficiency wage models

Firms may pay efficiency wages to enhance productivity. The conventional presumption is that efficiency wages are inefficiently high because they lead to unemployment that is also inefficiently high; government policies that lower wages raise output. Using a simple and general efficiency wage model, this paper finds a necessary and sufficient condition for the opposite conclusion. If the condition holds, wages are inefficiently low, leading to productivity that is also inefficiently low. It is the high-wage policies that raise output, even if they also lower employment. Published empirical results support the condition. No evidence is found for the conventional presumption.