Efficiency-Wage Theories

There are four theories that are designed to explain why it may be more beneficial for firms to pay employees above the equilibrium wage rate so they can operate more efficiently and make more of a profit.  They are as follows:

Efficiency-Wage Theory 1: If firms pays a reduced wage to its employees, those workers with higher skills and greater productivity will look for jobs elsewhere.  This would leave the firm with workers who have a lower skill range thus making them less productive overall.

Efficiency-Wage Theory 2: This deals with wages and nutrition.  It is believed that workers who have a higher salary can afford to eat more healthily and thus become more productive.

Efficiency-Wage Theory 3: If a firm pays a higher wage to its employees it provides them with an incentive not to look elsewhere for work. And even if they did have the incentive, they probably wouldn't be able to find the same pay for the same work elsewhere. This in turn reduces a company's need to train and hire more workers. 

Efficiency-Wage Theory 4: This theory deals with the willingness of an employee to work hard.  If firms are unable to monitor their workers closely, by paying them a higher wage, they are creating a higher cost for the worker to slack off and get caught and fired.

Henry Ford Case Study

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