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Efficiency WageKnowledge Center |
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What is an Efficiency Wage? Meaning.Why are many employers paying salaries or wages above the minimal rate as determined in the market? The phenomenon is explained by the economic concept called the Efficiency Wage hypothesis. Simply put, employers get more if they pay more: the increased labor productivity pays for the relatively higher wages. The term Efficiency Wages (aka "Efficiency Earnings") was coined by English Economist Alfred Marshall to denote the wage per efficiency unit of labor. He calculated an efficiency wage using efficiency or ability exerted being the unit of measure rather than time. In other words, a more efficient worker will be paid more than a less efficient worker for the same amount of hours worked. Lately the term is used somewhat differently. It now refers to the economic idea that higher wages increase the efficiency of the workers due to various reasons, making it worthwhile for companies to offer wages that exceed a market-clearing level. The optimal efficiency wage is reached at the point where the marginal cost of an increase in wages is equal to the marginal benefit of the improved productivity to an employer. There are multiple Efficiency Wages models (theories that explain why wages are often above a supply = demand clearing rate):
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