Do Efficiency Wages Actually Help in Increasing Labor Productivity?

Help in Increasing Labor Productivity
Post in Economics Assignment

In the arena of economics, the efficiency wages hypothesis is a popular theory that claims that the overall productivity of an industrial area can be enhanced to a great extent if the predetermined wages of the laborers are also increased. Hence, if the firms raise salary – a few or the entire higher wage rates will be recovered by the use of amplified workforce retention and higher work output. However, in addition to enhanced productivity, higher wages can also lead to higher MRP in the market.

An overview of the efficiency wages hypothesis

Alfred Marshall was the first to coin the phrase “efficiency wages” or “efficiency earnings”for the purpose ofreferring to the remunerationfor everyproficiencydivision of labor. This Marshallian concept of efficiency wages would make companiesshell outdissimilarpays to employees who are of diverseability, such that the owner would be unconcerned between morecompetentemployees and less competentemployees. The most up-to-dateapplication of the term is different to a certain extent and brings up the suggestion that higher wages possibly willraise the skill of the workers by a variety ofconduitswhile making it usefulin favor of the companies to provide wages that go beyond a market-clearing standard.

The efficiency wages theory is closely related to labor economics, the particular field of economics that focuses on the execution and dynamics of the marketplaces for wage industry. In particular, it points to the incentive for supervisors to reimburse their workers more than the market-clearing wage with the purpose of increasing their production or competence, or trim down charges connected with the return, in businesses where the rates of substituting manual labor are high. This augmented labor output and/or reduced charges provide financial support for the higher wages.

Potential reasons for which this theory is thought to be effective

Several aspects are there for which this theory is largely thought to be effective in the real-life scenario in an industrial area. The representation of efficiency wages, mostly based on the term “shirking” or work dropout and built up by Carl Shapiro and Joseph E. Stiglitz, has been predominantly significant. Let us have a look at some crucial portions of it:

  • Reducing the work dropout rate:

The case is that if employees are compensated a higher wage, they will be resisted from feelingthemselvesunneeded in the workplace. Consequently, if they have a job with a payconsiderablysuperiortoprofits or substitute jobs, they will have a betterimpetus to make an impact on their supervisor and maintain it. Shapiro and Stiglitz hypothesized that employees with a higher wage will perform at an exertion level which occupies no shirking. This wage is generally higher thanthe market clearing standards.

  • Gaining dependability:

If employees are given a higher salary, they may perhapshave more reliability towards the business and be enthusiastic to work more diligently and with more strength of mind. In comparison, if they feel they are being subjugated by a monopsonist owner, then they will do the smallest amount of work to scratch out a living, but attempt to get more break-times and not work attentively.

  • “Gift Exchange” between the owner and the worker:

According to G. Akerlof, the laborindustry has a ‘gift exchange’ where high-quality labor dealing relies largely on support and concern. If the companies pay wages greater thanthe market-clearing levels, it is quite obvious thatemployees would undertakeadditionalliability and inventiveness in response.

  • Lesser expenses of management:

JB Rebitzerobserved that inferior wages were combined withadvanced levels of administration. Employeesgetting higher salary were more stimulated to work and for that reason,requireda reduced amount ofadministrativemanagement.

  • Exerting a pull onfirst-ratelabor:

If a companygives outbeyond the market-clearing level, it will catch the attention ofworkers of abetter quality who will feel they can obtain the comparatively better-paid work.

  • Nutritional premise:

In emergent economies at extremelysmall rates of pay, escalatingsalary can make possible a decline in utter poverty. Betterphysical condition and nourishmentwill bring aboutimprovedmanual labor.

Can involuntary unemployment be an outcome of this theory?

The recently discussed shirking replica of efficiency wage theory affirms that owners have amotivation to lay out a wage higher than the market clearing level. If such is the condition, and if efficiency wages are prevalent,in that case, it may be capable ofgiving rise to spontaneousjoblessness with earningsexceeding the equilibrium and wages. On the other hand, in the case of monopsony, higher wages can raise wages exclusive of any cost of redundancy.

Real-life instances of the implementation of the theory

Anexperimental case for the smallest amountof efficiency wage was created in 1914 when Henry Ford launched a “five dollar day”. The payment was made above the market clearing rates but the condition was to stop any activity of the trade union. The productivity was instantly increased and according to economics theorists, Ford’s “five dollar day” was compatible with what was anticipated of the theory.

“There is vivid evidence that the five-dollar day resulted in substantial queues for Ford jobs. Finally, significant increases in productivity and profits at Ford accompanied the introduction of the five-dollar day.”

-Noted Raff andsummers in their 1986 article “Did Henry Ford pay efficiency wages”.

Does the theory hold any drawback?

In a real-life application, a lot ofissues settle onthe self-confidence and efficiency of the workers, with the salarybeing just one of them. Over and over again,additionalfeatures are more significant,for instance, work circumstances, supervision, occupational stress, health & safety issues, and so on. If the factors not related to wages are unhelpful, then higher wages only may possibly be inadequate to make productivity better.

Added to that, the success of this efficiency wages will depend on the rejoinder of other companies. If they also initiate paying greater than market-clearing levels, in that case, the profit from drawing top-quality employees will be gone astray.

Will Greece follow the footsteps of the Great Britain and move forward with Grexit?

Introduction: Ever since the exit of Britain from the European Union, another European country is following the footsteps of the English and closing on exiting the union. The name of that exit has been termed has Grexit as the country in question is named Greece.

The theoretical concept of Grexit:

The Greek’s exit from the union is a theoretical case which will help the country in tackling the debt crisis of the government. The retreat is yet to materialize, but the chance of happening is becoming more and bleaker. The term “Grexit” first introduced to the media around 2012 and the prospect of the exit revitalized on each bailout.

The positive impact on the Greek economy:

The positives of Grexit are huge as scrapping Euro and re-establishing drachma would exponentially boost the country’s chance of revenue generation from tourism and exporting domestic goods. The other positive is yet it will reduce the number of imports and give a viable opportunity for the Greeco economy to breathe.

 The critics of Grexit:

The people who stood against “Grexit” claimed that the move would overburden the citizens of the country with excess hardship. As a result, it may lead to unrest within the country and hurt the goodwill of the European Union. The other negative may involve alignment of Greece with more Non-European countries which can never be a piece of good news for the Union. If you want to know more about the effects of Grexit on the European Union .

The emergence of the term “Grexit”:

The word “Grexit” or “Graccident” first coined by economist EbrahimRahbari and introduced to the world by the Willem. H. Buiter who held the office of Global Chief Economist at the Citigroup on February the 6th of 2012. When Syriza party led by Alexis Tsipras came to power on 2015 due to a pre-term election of the parliament, they came to power with YanisVaroufakis as the Finance Minister, who had to play a leading role in tackling the debt crisis prevalent during that time.

During that period, the probability of “Grexit” was heavily discussed, and the prospect of happening seemed bright which was further fueled in 2015 when the bailout plebiscite got announced. On 29th June of the same year, the government declared the banks will remain shut all week, and withdrawals limit set at 60 Euros per day.

The IMF predictions:

The IMF or International Monetary Fund admitted that prediction on the economy of Greece seemed too generous and things started falling apart towards the end of 2010. In 2010, they labeled Greece’s first bailout referendum as a preparatory arrangement to build a protective wall for the economically weak countries of the Union. In 2012, when the rate of unemployment reached a range of 25% instead of predicted 15% by the IMF, they accepted that they downplayed the severity of the situation and the damage it would do the economy of the country.

The crisis of 2012:

In May of 2012, when the financial crisis broke the economic backbone of Greece, and the possibility of setting up a government seemed distant, the prospect of moving on with Grexit seemed bright. A large number of people within the country were yet to be convinced about the positives of the exit from the union and felt, in the long run, the negatives will outnumber the positives. The economist thought that the attempt to solve the debt crisis prevelant in the economics of Greece is unavoidable and even with moving forward with Grexit won’t help the cause.

The effect of Grexit on the US economy:

Many economists from the United States felt that the legalities based on which the European Union, IMF and European Central Bank enforced the harsh macroeconomics adjustment, negatively impacted the fragile Greek sovereignty and it also interfered with the internal matters of a well-established EU nation.

They strongly felt the exit of Greece from the Union would impact positively on the economics of the country and further provide freedom to the government to make policies for the people with hope for future generations and social equity. The Grexit may moderately affect US economics due to the Domino effect created in the Eastern European countries and more information.

The development of Plan Z: The year 2012 saw a radical approach from the Greek government to leave the euro zone in an event the Greek bank collapses and labeled the proposal as Plan Z. The outline of the plan was sworn with secrecy by groups of officials in small number from the EU Commission, the European Central Bank, and IMF. JorgAsmussen headed the group along with Thomas Wieser, Poul Thomsen and Marco Buti.

To avoid getting leaked to the media, not even a single document got created, emails not exchanged between the group members, in addition to that, not a single officials from Greece was informed. The probability of Greece quitting the EU, scrapping euro as their currency and promoting drachma forced several citizens to withdraw the Euros from the national banks; within nine months starting from March the stakes in Greek banks declined to 13%.

Against Plan Z several counter initiatives were taken, but students from Oxford University did the most notable one and named it MenoumeEuropi in 2012, and it rapidly unrolled among all students with citizenship of Greece in other distinguished universities of Europe. The first exhibition happened in Athens between two general elections that brought complete de-stabilization in the country politics and increased financial insecurity.

Author Bio:

MajaKazazic is a proficient educator associated with He was a student of economics at the University of California and currently, he is a full-time faculty member there. His specializations are labor economics, wage slavery, and so on. Because of his long teaching experience, he is capable of providing the students with the best academic help.