Scientific Research and Essays

  • Abbreviation: Sci. Res. Essays
  • Language: English
  • ISSN: 1992-2248
  • DOI: 10.5897/SRE
  • Start Year: 2006
  • Published Articles: 2755

Full Length Research Paper

A stochastic frontier approach for empirical tests of efficiency wage models

Masud Rana1, Azizul Baten2* and Anton Abdulbasah Kamil2
1Department of Statistics, Shah Jalal University of Science and Technology, Sylhet-3114, Bangladesh. 2Mathematics Program, School of Distance Education, Universiti Sains Malaysia 11800 USM, Penang, Malaysia.
Email: [email protected]

  •  Accepted: 21 May 2010
  •  Published: 04 June 2010


This paper was aimed at testing the validity of wage efficiency hypothesis in developing country through the impact of a wage efficiency policy on the relative technical efficiency of firms. We used wage augmented stochastic production frontier models to measure technical efficiency of food manufacturing industry using an unbalanced panel data set over the period 1988 - 1989 to 1999 - 2000.The wage augmented Cobb Douglas production function was found to be an inadequate representation of the data compared to wage augmented Translog frontier model. Our empirical analysis showed that the elasticity of the efficiency wage function of employee was, on average, -0.555 while that of operative was -0.039. The results indicated that wage efficiency policy was not valid for a developing country like Bangladesh. The mean technical efficiency was estimated 0.398 implying that only 39.8% of the potential output is being realized in this sector.


Key words: Efficiency wage, stochastic frontier production function, technical efficiency.