Skip to main content

A note on internal and external reference in efficiency wage models


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.


  • 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

    Article  Google Scholar 

  • Akerlof GA (1982) Labor contracts as partial gift exchange. Q J Econ 97: 543–569

    Article  Google Scholar 

  • Akerlof GA, Yellen JL (1986) Efficiency wage models of the labor market. Cambridge University Press, Cambridge

    Google Scholar 

  • Alexopoulos M (2006) Shirking in a monetary business cycle model. Can J Econ 39: 689–718

    Article  Google Scholar 

  • Andrews IR, Henry MM (1963) Management attitudes toward pay. Ind Relat 3: 29–39

    Article  Google Scholar 

  • Bewley TF (1999) Why wages don’t fall during a recession. Harvard University Press, Cambridge

    Google Scholar 

  • Campbell CM, Kamlani KS (1997) The reasons for wage rigidity: evidence from a survey of firms. Q J Econ 112: 759–789

    Article  Google Scholar 

  • Danthine JP, Kurmann A (2006) Efficiency wages revisited: the internal reference perspective. Econ Lett 90: 278–284

    Article  Google Scholar 

  • Danthine JP, Kurmann A (2007) The macroeconomic consequences of reciprocity in labor relations. Scand J Econ 109: 857–881

    Article  Google Scholar 

  • 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

    Google Scholar 

  • Franz W, Pfeiffer F (2006) Reasons for wage rigidity in Germany. Labour Rev Labour Econ Ind Relat 20: 255–284

    Google Scholar 

  • Goette L, Sunde U, Bauer T (2007) Wage rigidity: measurement, causes and consequences. Econ J 117: F499–F507

    Article  Google Scholar 

  • 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

    Google Scholar 

  • Salop SC (1979) A model of the natural rate of unemployment. Am Econ Rev 69: 117–125

    Google Scholar 

  • Shapiro C, Stiglitz JE (1984) Equilibrium unemployment as a worker discipline device. Am Econ Rev 74: 433–444

    Google Scholar 

  • Weiss A (1980) Job queues and layoffs in labor markets with flexible wages. J Pol Econ 88: 526–538

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations


Corresponding author

Correspondence to Ronnie Schöb.

Rights and permissions

Reprints 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).

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI:


  • Efficiency wages
  • Wage rigidity
  • Internal and external reference wage

JEL Classification

  • E24
  • E32
  • J50