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Higher wages increase labor costs but also improve the productivity of the labor force in several ways. If firms take this into account and set their wages accordingly, the resulting wages could fail to adjust demand and supply but may induce phenomena like over-education, discrimination, regional wage differentials, and a tendency for larger firms to pay higher wages. All these phenomena are quantitatively important and well-established empirically. Efficiency wage theory provides an integrated theoretical explanation rather than a sundry list of reasons, and offers an efficiency argument for progressive income taxation.

Higher wages increase labor costs but improve the productivity of the labor force through several channels. If firms take this into account and set their wages accordingly, the resulting wages may fail to adjust demand and supply but may engender phenomena like over-education, discrimination, regional wage differentials and a tendency for larger firms paying higher wages. All these phenomena are well established empirically. Efficiency wage theory provides an integrated explanation for them, rather than a sundry list of diverse reasons. At the same time, it provides an efficiency argument for progressive income taxation.

We exploit regional differences in labour market density to conduct a simple empirical test of dynamic monopoly and selection wage theories. According to selection wage theories employers offer above-average wages in order to attract more applicants. This allows them to be choosier and to select only the most productive workers. High wage offers reach more potential applicants in densely populated regions and can therefore be expected to be more important there. Observationally similar predictions arise in models of dynamic monopsony. The empirical implication, that firm-size wage effects should be more pronounced in urban labour markets, is tested empirically based on the German employment register data. Our results are in favour of monopsony and selection wage theories.

The increasing wage inequality in many countries is usually seen as brought about by economic forces that drive for economic efficiency within a changing technological and social environment. Ethical evaluations of these developments diverge, yet the view that free labor markets drive to efficiency remains undisputed. This note sets out to criticize, in a non-technical manner, this efficiency presumption which is based on Adam Smith’s theory of wage setting. It is urged that a Smithian wage structure would indeed be both efficient and fair. Yet modern labor markets work in ways that are fundamentally different to what was envisaged by Adam Smith. That makes the outcomes observed in modern labor markets, according to Smithian standards, both inefficient and unfair. As a consequence, the pursuit of the Smithian ideal requires organizational remedies, intervention and regulation in labor markets.

In der Öffentlichkeit wird oft die These vertreten, daß die zunehmende Ungleichheit der Lohneinkommen ökonomisch geboten, wenn auch gesellschaftspolitisch bedenklich sei. In diesem Beitrag wird gezeigt, daß die Lohnbildung in modernen Arbeitsmärkten nicht dem Prinzip der kompensierenden Differentiale folgt und damit zugleich ungerecht und ineffizient ist. Maßnahmen, die die Lohnspreizung eindämmen, fördern zugleich Effizienz und Gerechtigkeit., In German public discourse it is often argued that the increasing wage inequality we observe is economically required but may be problematic from a social point of view. It is urged here that wage formation in modern labor markets deviates systematically from what the principle of equalizing wage differentials would require. In this sense, it is both inefficient and unfair. Measures that curb wage dispersion increase both efficiency and fairness.

Applicants for any given job are more or less suited to fill it, and the firm will select the best among them. Increasing the wage offer attracts more applicants and makes it possible to raise the hiring standard, thereby improving the productivity of the staff. Wages that optimize on the trade-off between the wage level and the productivity of the workforce are known as selection wages. As men react more strongly to wage differentials than females, the trade-off is more pronounced for men and a profit-maximizing firm will offer a higher wage for men than for women in equilibrium. The argument is not confined to issues of sex discrimination; rather it is of relevance for all labor markets where labor heterogeneity is important and supply elasticities vary systematically across occupations.

Applicants for any given job are more or less suited to fill it, and the firm will select the best among them. Increasing the wage offer attracts more applicants and makes it possible to raise the hiring standard and improve the productivity of the staff. Wages that optimize on the trade-off between the wage level and the productivity of the workforce are known as selection wages. As men react more strongly to wage differ¬entials than females, the trade-off is more pronounced for men and a profitmaximizing firm will offer a higher wage for men than for women in equilibrium.

The expansion of higher education in the Western countries has been accompanied by a marked widening of wage differentials and increasing overqualification. While the increase in wage differentials has been attributed to skill-biased technological change that made advanced skills scarce, this explanation does not fit well with the observed increase in overqualification which suggests that advanced skills are in excess supply. By "Reder-competition" I refer to the simultaneous adjustment of wage offers and hiring standards in response to changing labor market condition. I present a simple model of Reder competition that reproduces the simultaneous increase in wage differentials and overqualification in response to an increase in education.

The expansion of higher education in the Western countries has been accompanied by a marked widening of wage differentials and increasing over-qualification. While the increase in wage differentials has been attributed to skill-biased technological change that made advanced skills scarce, this explanation does not fit well with the observed increase in over-qualification which suggests that advanced skills are in excess supply. By “Reder-competition” I refer to the simultaneous adjustment of wage offers and hiring standards in response to changing labor market conditions. I present a simple model of Reder competition that depicts wages as driven by labor heterogeneity, rather than scarcity. The mechanism may give rise to a simultaneous increase in wage differentials and over-qualification.