Efficiency Wage
According to efficiency-wage theory, high wages.may increase efficiency and actually lower labor costs if they:
1. Attract higher-quality applicants.
2. Lower turnover.
3. Increase worker effort.
4. Reduce "shirking" (what economists say when they mean "screwing around"). The higher the wage, the less likely it is that an. employee would be able to find another job that pays as well. Also, the risk of losing. one's high-paying job depends on how like ij, it is that you can be replaced. One indicator is the unemployment rate. (Karl Marx referred to the unemployed .as a "reserve army" that employers can use to replace current workers.) Thus, efficiency wage predicts that high effort will be most likely and shirking likely to the degree that the wage premium is high and the unemployment rate is high.
5. Reduce the need to supervise employees (academics say "monitoring"). So, basically, efficiency increases by hiring better employees or motivating present employees to work smarter or harder. The underlying assumption is that pay level determines effort, again, an appealing notion that is difficult to document. Later in this chapter (see the Appendix), we-show how something called utility theory can help compare the costs and benefits of different pay level policies. We will also discuss how business strategy plays a role in pay level choice.