Efficiency wage hypothesis - The case of Pakistan

Syed Kanwar Abbas*, Asad Zaman

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)


The object of this paper is to present an exposition of Efficiency Wage theory, and to test its basic assertions in the context of Pakistan. The Great Depression of 1929 showed that labour disequilibrium persists for long periods of time. One of the causes of this was rigidity of nominal wages, which was assumed without explanation by Keynes in his General Theory. Stagflation in the 1970s led to re-examination of Keynesian theories and a search for a satisfactory theoretical explanation of wage rigidity. Efficiency Wage theories provide an explanation by suggesting that worker productivity increases with wage. This means that firms may not have incentive to cut wages even when they are above equilibrium. Substantial empirical evidence for efficiency wages has been found in the context of advanced economies, but there is very little literature for developing countries. Saygili (1998) has given evidence for efficiency wages in the Turkish economy. Nasir (2000) provides empirical evidence for a wage differential between private and public sectors in Pakistan, which conforms to efficiency wage considerations. In this paper, we show that the textile sector in Pakistan appears to offer efficiency wages, while other sectors conform to neoclassical competitive labour market theories.

Original languageEnglish
Pages (from-to)1051-1064
Number of pages14
JournalPakistan Development Review
Issue number4 PART II
Publication statusPublished - Dec 2005
Externally publishedYes


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