In labor economics, the efficiency wage hypothesis argues that wages, at least in some markets, are determined by more than supply and demand. Specifically, it points to the incentive for managers to pay their employees more than the market-clearing wage in order to increase their productivity or efficiency. This increased labor productivity pays for the higher wages.
Because workers are paid more than the equilibrium wage, there will be unemployment. Efficiency wages are therefore a market failure explanation of unemployment – in contrast to theories which emphasize government intervention (such as minimum wages).
The idea of efficiency wages was expressed as early as 1920 by Alfred Marshall. Efficiency wage theory has reemerged several times and is especially important in new Keynesian economics.
Read more about Efficiency Wage: Overview, Shirking, Labor Turnover, Adverse Selection, Empirical Literature
Famous quotes containing the words efficiency and/or wage:
“I’ll take fifty percent efficiency to get one hundred percent loyalty.”
—Samuel Goldwyn (1882–1974)
“Most women without children spend much more time than men on housework; with children, they devote more time to both housework and child care. Just as there is a wage gap between men and women in the workplace, there is a “leisure gap” between them at home. Most women work one shift at the office or factory and a “second shift” at home.”
—Arlie Hochschild (20th century)