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.
Actually, there are multiple Efficiency Wages models
(theories that explain why wages are often above a supply = demand clearing
rate):
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Inhibit Shirking. It is not easy to measure the quantity
or quality of a worker's effort. There may be an incentive for employees
to "shirk" (do less work than agreed). Managers may pay a premium in order
to create or increase the cost of job loss, which gives a sting to the threat
of firing. This threat can be used to prevent shirking (or "moral hazard").
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Reduce Labor Turnover. By paying a premium, the costs
can be decreased of searching, recruiting and training replacement workers,
should an employee decide to quit and seek a job elsewhere.
-
Adverse Selection. Firms with higher wages might
attract more able job-seekers. The employer can select the best.
-
Create a sense of Obligation. Efficiency wages may
simply result from traditions. Higher wages encourage high morale and increases
Organizational Commitment,
which raises productivity.
-
Avoid unobserved ill discipline. In poor countries,
efficiency wages may allow workers to eat well enough to avoid illness and
Work Absenteeism and to
be able to work harder and more productively.
-
Corporate
Responsibility. The need or want to be fair or to be a good citizen
of society.
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Compare with:
Opportunity Cost |
Value for Money Audit
| Cost-Benefits Analysis
| Expectancy Theory
| Two Factor Theory
| Employee Attitude
Survey
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