According to Bewley, a workers’ morale depends on being treated fairly within firms. This implies that the internal comparison of the own wage with wages paid to other workers within the firm affects individual effort determination. By contrast, the standard efficiency wage models only consider a comparison of the own wage with external income opportunities as the only determinant for individual effort. We provide a simple efficiency wage framework in which both the internal and external perspectives can affect individual effort determination. Our framework suggests that the internal reference is essential for the existence of real wage rigidity while the external reference ensures an upward-sloping wage-setting curve.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Price excludes VAT (USA)
Tax calculation will be finalised during checkout.
Agell J, Bennmarker H (2003) Endogenous wage rigidity. CESifo working paper no. 1081, November
Agell J, Bennmarker H (2007) Wage incentives and wage rigidity: a representative view from within. Labour Econ 14: 347–369
Akerlof GA (1982) Labor contracts as partial gift exchange. Q J Econ 97: 543–569
Akerlof GA, Yellen JL (1986) Efficiency wage models of the labor market. Cambridge University Press, Cambridge
Alexopoulos M (2006) Shirking in a monetary business cycle model. Can J Econ 39: 689–718
Andrews IR, Henry MM (1963) Management attitudes toward pay. Ind Relat 3: 29–39
Bewley TF (1999) Why wages don’t fall during a recession. Harvard University Press, Cambridge
Campbell CM, Kamlani KS (1997) The reasons for wage rigidity: evidence from a survey of firms. Q J Econ 112: 759–789
Danthine JP, Kurmann A (2006) Efficiency wages revisited: the internal reference perspective. Econ Lett 90: 278–284
Danthine JP, Kurmann A (2007) The macroeconomic consequences of reciprocity in labor relations. Scand J Econ 109: 857–881
Dickens WT, Goette L, Groshen EL, Holden S, Messina J, Schweitzer ME, Turunen J, Ward ME (2007) How wages change: micro evidence from the international wage flexibility project. J Econ Perspect 21.2: 195–214
Franz W, Pfeiffer F (2006) Reasons for wage rigidity in Germany. Labour Rev Labour Econ Ind Relat 20: 255–284
Goette L, Sunde U, Bauer T (2007) Wage rigidity: measurement, causes and consequences. Econ J 117: F499–F507
Knoppik C, Beissinger T (2005) Downward nominal wage rigidity in Europe: an analysis of European micro data from the ECHP 1994–2001, IZA discussion paper no. 1492, February
Nickell S, Layard R (1999) Labor market institutions and economic performance. In: Ashenfelter O, Card D (eds) Handbook of labor economic, vol 3C. Elsevier, Amsterdam, pp 3029–3084
Salop SC (1979) A model of the natural rate of unemployment. Am Econ Rev 69: 117–125
Shapiro C, Stiglitz JE (1984) Equilibrium unemployment as a worker discipline device. Am Econ Rev 74: 433–444
Weiss A (1980) Job queues and layoffs in labor markets with flexible wages. J Pol Econ 88: 526–538
Rights and permissions
About this article
Cite this article
Koskela, E., Schöb, R. A note on internal and external reference in efficiency wage models. J Econ 96, 79–86 (2009). https://doi.org/10.1007/s00712-008-0044-9
- Efficiency wages
- Wage rigidity
- Internal and external reference wage