5) Lapides rounds out his discussion of the early literature on wage theory with a chapter on the early radical and social critics of political economy.
Lapides's argues that Marx's wage theory develops gradually and only really reaches its full and complete form in Marx's mature writings, of which Capital is the best example.
As a result, the efficiency wage rate does not vary over the business cycle under Solow's efficiency wage theory.
A notable feature of efficiency wage theory is that labor supply plays no role in the determination of the wage rate.
More generally, efficiency wage theory said that it paid firms to pay a higher wage than necessary to obtain workers; but the level of the efficiency wage could vary across firms; for instance, firms with higher turnover costs, or where worker inefficiency could lead to large losses of capital, or where monitoring was more difficult, might find it desirable to pay higher wages.
Our analysis of efficiency wage theory provided an alternative explanation.
The efficiency wage theory
is generally regarded as a plausible explanation as to why wages do not fall to clear labor markets in the presence of involuntary unemployment.
This version of Efficiency Wage Theory has been developed by Shapiro and Stiglitz (1984), Bowles (1985), Fehr (1986) and others.
The efficiency wage theory suggests that Solow condition holds which implies that percent change in wage should lead to percentage change in effort level to such an extent it will be unity.
In the earliest "sociological" version of efficiency wage theory
based on gift exchange, firms give workers above market-clearing wages and workers reciprocate in their commitment to the firm.
This section discusses possible ways that efficiency wage theory
may be modified by the proposition that quits depend on the change in the wage as well as on its level.
A major deficiency here is the neglect of efficiency wage theory
which has been a prominent development in the literature.