Why do some firms pay more than the market wage rate? A case study with longitudinal data

This research studies the three main economic theories of wage as they apply to a specific case study using longitudinal panel data. The firm in the case study pays employees above market wage which presents an interesting opportunity to scrutinize the validity of each wage theory. The economic theories associated with the neoclassical school of thought, the institutional school of thought and power relationships are each tested for a fit with the case study data. Relative to the neoclassical theory, the efficiency wage theory and agency theory are tested as these are the elements of neoclassical thought which support wages above market rates. Two tests are used to evaluate the hypotheses. The first is a formal econometric test of the shirking model of the efficiency wage theory using production and pay data at the factory level. This is made possible because the four factories in the case study have essentially the same cultural and institutional environment, along with shared production technology and similar product output. As such, control is provided for elements other than wage differences between the factories. The second test is a survey of plant management. The survey provides a view of both what plant management was trying to accomplish with wage policy, and also how effective they felt the pay practices were. In addition to the survey, the culture within the firm is analyzed logically for its connection to pay practices. This research concludes that for the four factories studied there is no support for the shirking model of the efficiency wage theory or agency theory. As a result the standard neoclassical wage theory cannot explain the above market wage and is called into question, at least as a generalized model. In addition, there is substantial support provided for the institutional theories around wage as well as evidence of the power of the threat of union organizing. The management survey, the logical analysis of firm culture, and the comparisons to the organizational behavioral research all support the findings that institutional factors heavily influence wages in the sample firm.