Question

Consider the efficiency wage model. (a) If there is excess supply of labour in the market willing to work for a lower wage than is currently being paid to workers, why would a firm not employ these workers at a lower wage than the efficiency wage? (b) Can you provide one example of something that might affect the efficiency wage?

Answer 1

Answer- A : According to the efficiency wage model firms would pay wages to workers which are higher than the equilibrium wages to increase their productivity. This is generally popular in those indistries where the cost of hiring is high and thus to avoid that and to increase productivity the firms are willing to offer wages higher than the equilibrium wage level.

If workers are available in an economy who are ready to work for low wages then also the firm would hesitate to employee these workers. The reason behind this is that the firm will yry to avoid the cost of hiring new workers as the recruitment will take time and even after hiting them their will be additional wastage of time for training the newly recruited workers. This can lead to low productivity levels and will be less profitable for the firm.

The main motive behind efficient wage model is to reduce the labor turnover and this is generally seen in the industries where the cost of hiting is quite high and thus is unfavourable for the firm to hire new workers.

One example that could affect the wage model is :

In firms where same workers are hired for many years and are paid wages higher than the equilibrium wage level they get a sense of belongingness with the firm. Due to higher wages their productivity increases but with the due course of time when they have the knowledge that hiring new workers would cost the firm more , then they imbibe the habit of working less efficiently as they are known of their job security. This reduces the productivity. Also in cases where the dirm requires continous upgradation of skills, the old workers tend yo perform poorly and there arises a need to hire new workers with new skills and talents.