The Efficiency Wage

Essay # 62950

Accounting > Theory
Economics > Labor
Economics > Macro

The Efficiency Wage

This paper analyses the practice of some firms to pay a wage above the market clearing wage level called the efficiency wage.

1,920 words () | 7 sources | APA | 2004 United Kingdom

Paper Summary:

This paper explains that some firms, especially in third world economies, will attempt to increase their profits by improving their worker productivity by paying a wage that is above the wage paid by other competing firms because, at the market level wage, workers may not get the necessary nutrients they require in order to carry out the working day's hard labor and to maintain a healthy lifestyle. The author points out that the ability of a firm to increase profits by setting these wages may not necessarily apply in other more industrialized labor markets where there is not a strong correlation between worker productivity and their nutritional intake. The paper relates that the efficiency wage model indicates that the behavior of a firm seeking to increase its profits is no longer limited to just decisions on how many workers to hire.

From the Paper:

"It has been mentioned once before in this essay that efficiency wages may not necessarily hold true in today's modern, industrialized economies. However, there is empirical evidence that efficiency can hold true in an industrialized setting and not just in a subsistence one. If this is the case, then the economic rationale behind firm's setting wages above the market clearing wage, is a sound rationale. There is evidence that shirking-related employee problems are reduced when companies pay higher salaries. A study of large manufacturing companies in the United States shows that fewer workers are dismissed for disciplinary reasons when a firm pays a high rate of wage. In particular, a 10 percent increase in the wage reduced the rate at which workers were dismissed for disciplinary reasons . Hence, the economic rationale behind firms setting an efficiency wage is very plausible indeed, as back by empirical research such as this."