Question

What is an efficiency wage? How might payment of an above-market wage reduce shirking by employees and reduce worker turnover? How might efficiency wages contribute to downward wage inflexibility, at least for a time, when aggregate demand declines?

Answer 1

An efficiency wage is one that minin bizes. the firms labor cost per unit of ouppect. Normally we could assume that the market wage for the particular type of labor would be efficient, since it is the lowest wage that could be paid to obtain workers in the classificacion. Firms may discover bowa ever, that paying a wage that is higher than the market wage will lower their wage cost per urit of opp. there are number of reasons for this possible outcome. First the above market wage raises the opportunity cost of loosing the job and gives workers an incentive to retain their relatively high paying jobs. worker productivity is likely to be higher & in i sense the higher

wage more than pays for itself. Second, motivated workers require less supervision. If the firm needs fewer supervisory personnel to monitor work performance, the overall wage Cost per unit of output can be lower. 1. Third, the above-market pay discou- pages workers from voluntarily leaving their jobs a lower turnover rate reduces the firms cost of hiring a training new workers. It also gives the firm a better selection of - potential workers, since the above market wage would increase applications, Efficiency wages are likely to contribute to downward wage inflexibility, wage cuts may encourage shinking Require more supervising personnel & increased therm- over. wage cuts that reduce prom du Cainity & raise per unit labor costs are self defeating