The Trade-Off Between Supervision and Wages: Evidence of Efficiency Wages from the NLSY

Standard efficiency wage models suggest that workers employed in places with lower probabilities of identifying shirking will earn more, as will workers who have better alternative opportunities. This paper provides new empirical evidence in support of efficiency wage theory using the National Longitudinal Surveys of Youth data. The empirical results support the prediction of the model that workers employed in larger work groups are paid more, a finding consistent with a supervision–wage trade-off. Additional evidence supports the prediction that workers with better alternative opportunities earn more.