This thesis assesses the efficiency wage hypothesis using Australian industry and macro economic time series data by focussing on two questions: whether paying an above market clearing wage called the efficiency wage raises industry output and productivity, and if such a payment causes unemployment at the macro economic level. The wageproductivity or wage-output nexus is investigated using three techniques; namely a decomposition procedure used by Huang, Halam, Orazem, and Paterno (1998), an instrumental variable estimation method, and the Solow residuals approach. Further, an examination of macro economic unemployment involves developing an aggregate unemployment equation, where the Solow (1979) model is used to derive a testable hypothesis. The Solow model argues that effort, which is a function of the wage, enters the production function when the real wage is rigid. By introducing profit maximising behaviour and making further economic assumptions, the Solow condition that the effort elasticity with respect to the wage is one can be derived. The theoretical framework of Solow is useful as specifying a production function allows the possibility of aggregate data being used to assess the wage-productivity prediction. The Solow condition is also useful because it provides the basis for constructing a testable hypothesis using an unemployment equation. Solow???s theoretical framework and the Solow condition does not rely on the economic assumptions of the shirking, labour turnover, sociological and adverse selection [micro economic] efficiency wage models. Therefore, the innovation of this thesis is to treat the efficiency wage hypothesis as an imperfectly competitive model of the labour market using applied macro economic methods. Previous Australian macro economic literature in the 1970s and 1980s have argued that the wage is either harmful to employment prospects (ie unemployment is classical), or that factors such as consumption and investment are more important (ie unemployment is Keynesian). One of the aims of the thesis is to use the empirical analysis to suggest that neither of these propositions is entirely correct. Rather, an intermediate position is arrived at by arguing that there is some empirical evidence in Australian industry and macro economic time series data to suggest that the wage plays a dual function: both as a small source of productivity and also a minor cause of involuntary unemployment.

This thesis assesses the efficiency wage hypothesis using Australian industry and macro economic time series data by focussing on two questions: whether paying an above market clearing wage called the efficiency wage raises industry output and productivity, and if such a payment causes unemployment at the macro economic level. The wageproductivity or wage-output nexus is investigated using three techniques; namely a decomposition procedure used by Huang, Halam, Orazem, and Paterno (1998), an instrumental variable estimation method, and the Solow residuals approach. Further, an examination of macro economic unemployment involves developing an aggregate unemployment equation, where the Solow (1979) model is used to derive a testable hypothesis. The Solow model argues that effort, which is a function of the wage, enters the production function when the real wage is rigid. By introducing profit maximising behaviour and making further economic assumptions, the Solow condition that the effort elasticity with respect to the wage is one can be derived. The theoretical framework of Solow is useful as specifying a production function allows the possibility of aggregate data being used to assess the wage-productivity prediction. The Solow condition is also useful because it provides the basis for constructing a testable hypothesis using an unemployment equation. Solow???s theoretical framework and the Solow condition does not rely on the economic assumptions of the shirking, labour turnover, sociological and adverse selection [micro economic] efficiency wage models. Therefore, the innovation of this thesis is to treat the efficiency wage hypothesis as an imperfectly competitive model of the labour market using applied macro economic methods. Previous Australian macro economic literature in the 1970s and 1980s have argued that the wage is either harmful to employment prospects (ie unemployment is classical), or that factors such as consumption and investment are more important (ie unemployment is Keynesian). One of the aims of the thesis is to use the empirical analysis to suggest that neither of these propositions is entirely correct. Rather, an intermediate position is arrived at by arguing that there is some empirical evidence in Australian industry and macro economic time series data to suggest that the wage plays a dual function: both as a small source of productivity and also a minor cause of involuntary unemployment.