THE THEORY OF EFFICIENCY WAGES
Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity.
The theory of efficiency wages states that firms operate more efficiently if wages are above the equilibrium level.
A firm may prefer higher than equilibrium wages for the following reasons:
Worker Health: Better paid workers eat a better diet and thus are more productive.
Worker Turnover: A higher paid worker is less likely to look for another job.
A firm may prefer higher than equilibrium wages for the following reasons:
Worker Effort: Higher wages motivate workers to put forward their best effort.
Worker Quality: Higher wages attract a better pool of workers to apply for jobs.