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:
“Nothing comes to pass in nature, which can be set down to a flaw therein; for nature is always the same and everywhere one and the same in her efficiency and power of action; that is, nature’s laws and ordinances whereby all things come to pass and change from one form to another, are everywhere and always; so that there should be one and the same method of understanding the nature of all things whatsoever, namely, through nature’s universal laws and rules.”
—Baruch (Benedict)
“Superstition, bigotry and prejudice, ghosts though they are, cling tenaciously to life; they are shades armed with tooth and claw. They must be grappled with unceasingly, for it is a fateful part of human destiny that it is condemned to wage perpetual war against ghosts. A shade is not easily taken by the throat and destroyed.”
—Victor Hugo (1802–1885)