Do efficiency wages explain dismissals?

Abstract

This study modifies Rebitzer's (1987) model of efficiency wages to predict dismissal from employment. Using a sample selection method and data from Australian workplaces, the analysis supports the predictions that both very high and very low levels of required effort, loose labour markets and high dismissals costs are associated with fewer dismissals. Among other results, we find extensive internal labour markets and active unions reduce dismissals. The evidence suggests that large employers rely more heavily on dismissals to motivate employees, although such employers screen more effectively and so exhibit lower dismissal rates(JEL J24,J41,J42).