Involuntary Unemployment and Non-Compensating Wage Differentials in an Experimental Labour Market

In this paper we report the results of a series of efficiency wage experiments. Some of the key predictions of the efficiency wage hypothesis are qualitatively confirmed by the data: (i) higher wages caused a reduction in shirking; (ii) firms offered contracts which exhibited positive job rents; (iii) firms offered systematically different wages and job rents which gave rise to non-compensating income differentials; and (iv) endogenous involuntary unemployment occurred.