A NEW THEORY DEVELOPS
As the 20th century came to a close, a development called "efficiency wage theory" was gaining popularity. Efficiency wage theory was initiated by neoclassically oriented labor economists who acknowledge the failure of their traditional competitive framework to explain persistent real-world inter- and intra-industry wage differentials for workers with identical productive characteristics, as well as its inability to account for the growth of chronic unemployment. Efficiency wage theory has elicited considerable unanimity among the previously feuding groups of radical, institutional, and orthodox neoclassical labor economists.
Though many different versions abound, the central premise of efficiency wage theory is that the payment of wage rates above the assumed market equilibrium wage will result in a profit-maximizing outcome and permit capitalist firms to minimize total unit labor costs. Accordingly, above-equilibrium wage rates are thought to induce increased effort and productivity and a reduction in worker shirking; reduced turnover costs; perceived greater costs of termination; improved worker morale; and the attraction and retention of better quality personnel.
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