Efficiency Wages

Efficiency wages refer to wages paid out by employers that exceed market-clearing wage. In some markets, it has been found that wages are influenced by factors other than demand and supply. Higher wages are paid out by employers in order to increase productivity and efficiency. Increase in labour productivity offsets extra expenses incurred by the employer in paying out higher wages. Efficiency wages also help in reducing work shirking, dissuading workers from seeking out new employment, and to attract more job seekers.

A nutritional theory further lends support to the introduction of efficiency wages. For developing countries, it is suggested that efficiency wages help workers to remain free from illness and be involved in production processes on a continuous basis. Efficiency wages are also believed to improve the morale of workers leading to greater productivity.

Reduction in work shirking

Difficulty in measuring the productivity of a worker, in terms of quality and quantity, may lead to work shirking. From a worker’s viewpoint, efficiency wages increase the value of a job. This benefits an employer since workers will be keener to sustain their job.

Retention

Efficiency wages help in retaining workers since higher wages discourage them from looking out for a new job. This reduces or eliminates any additional cost incurred by an employer in training replacement workers.

Hirings

Employers offering higher wages will naturally generate more interest among job hunters. A large number of job applicants allows an employer to be selective about new hirings and increases chances of hiring efficient workers.

Morale Booster

Efficiency wages often act as a morale booster. It has a positive effect on a worker’s abilities and encourages him or her to become more productive and efficient. This augurs well for both employee and employer.

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