Question

Please use two economic concepts. Thank u.

What's the purpose of an efficiency wage? In what industries might you expect to see efficiency wages? In what industries would you not expect to see it? Why?

Answer 1

Efficiency wage is the wage which is higher than the market rate. The wage is higher because the firms thinks that to increase output (or productivity), they must pay their workers higher wage. This will boost the morale of workers and discourage inventory shrinkage. Thus, the purpose of efficiency wage is to improve productivity. It means if firms increase wages, all these costs will be recovered through retention and higher productivity. Efficiency wages are seen in those industries which spends higher cost on learning and development of worker. In other words, the industries where the cost of replacing the labor is high. For example, a researcher in pharma industry. The cost of on-job training is high. To be at such post, a person must require specific subject and experimental knowledge. Thus, efficiency wages are expected to be seen here because the cost of replacement is high, and the company doesn't want to bear that. Instead they are ready to provide higher wage than the market rate. Efficiency wages are not seen in industries where the cost of replacing the labor is low. For example, the fast-food worker. The cost of on-job training is low and non-technical. One doesn't require any specific knowledge to work there. A normal person can learn the whole process in few hours. In such industries, efficiency wages are not seen because there is no need to pay the worker higher than the market rate.