The Role of Efficiency Wages in Determining the Inter-Industry Wage Differentials: Evidence from North Macedonia

Abstract

The efficiency wage theory states that the workers’ productivity depends on their wages, thus firms find beneficial to pay higher than the market clearing wages by expecting an increase in labour productivity. Hence, this alterative approach to orthodox economic theory assumes a reversed causality established between wages and labour productivity. The efficiency wage models take into account the potential influence of institutional arrangements. For instance, the ICT industry characteristics such as possibility for platform work affect wage levels and contribute to paying wage premium (exposure to the global competition). The evolution of real wages in North Macedonia over the last decade shows an outstanding inter-industry wage differentials, where Information and communication; and Finance and insurance appear as sectors with constantly high average real wages compared to the national average level. In order to explore the possible reversed causation between labour productivity and real wages, we estimate a homogeneous panel vector autoregression (VAR) model by fitting a multivariate panel regression of each dependent variable on lags of itself and on lags of other dependent variables using generalized method of moments (GMM). The results confirm the efficiency wage theory assumption since we found statistically significant impact of real wages on labour productivity and not vice-versa. This conclusion opens a wide room for justifying the policies that favour increases of real wages by tying them to increases in productivity. The identified wage premium, particularly from working in the ICT sector, suggests that the policy need to focus on stimulating widespread adoption of digital technologies across other sectors through education and training.