RESIDUAL WAGE DISPERSION WITH EFFICIENCY WAGES

This article extends a classic on-the-job search model of homogeneous workers and firms by introducing a shirking problem. Workers choose their effort levels and search on the job. Firms elicit effort through wages and monitoring; an inverse relationship between wages and monitoring rates is derived. Wages play a dual role by allocating labor supply and motivating employee effort. This gives rise to an equilibrium wage distribution that contrasts with existing literature. In particular, I show that a hump-shaped and positively skewed wage distribution, as observed empirically, can be derived even when firms and workers are, respectively, identical.