"Do the Opposite": Efficiency Wages and Incentives for Employer Candor
George: Elaine, bald men, with no jobs, and no money, who live with their parents, don’t approach strange women.
Jerry: Well here’s your chance to try the opposite. Instead of tuna salad and being intimidated by women, chicken salad and going right up to them.
George: Yeah, I should do the opposite, I should.
Jerry: If every instinct you have is wrong, then the opposite would have to be right.
George: Yes, I will do the opposite. I used to sit here and do nothing, and regret it for the rest of the day, so now I will do the opposite, and I will do something!
The same lesson often applies to government intervention. Yes, market failures do exist. But when you look at “corrective” policy, it often turns out to be the opposite of what economic theory recommends.
Case in point: Quite a few economists worry about so-called “efficiency wages.” Carl Shapiro and Joe Stiglitz worked out the canonical version of the model. (If you have Jstor access, the whole article should be here). Suppose employers cannot perfectly monitor their employees. How can they maintain worker discipline? One route: Raise your employees’ wages so you can scare them by threatening to fire them if they cross the line. People worry a lot more about losing a good job than a crummy job.
If everyone does this, the result is some permanent involuntary unemployment. Wages do not fall in response to the labor surplus because at lower wages, employees would stop worrying about getting fired and start misbehavin’.
The fundamental social problem of efficiency wages is that they cause involuntary unemployment. The higher the wage, the worse the problem. So how could you alleviate the problem? One simple method is to increase the stigma of getting fired. If stealing pencils goes on your “permanent record,” you might think twice even if your current job is nothing special.
So what happens in the real world? Does the law force employees to candidly share information about wayward employees in order to dampen the effects of efficiency wages on employment? No way. It does the opposite. These days, employers are extremely reluctant to share negative information about a former employee because they might get sued. (This is especially true if the former employee is already in a “protected class” – i.e. is not a white male under the age of 40). If an employee steals pencils, you don’t tell his next potential boss that he’s a thief, because maybe the thief will find out and go to a lawyer. The law punishes honesty, not dishonesty, or silence.
If you seriously wanted to reduce the fall-out of efficiency wages, you wouldn’t let employees sue former employers for narcing on them; you would let current employers sue their workers’ past employers who covered up their on-the-job shenanigans!