Efficiency wage
Topic: Employment, Unemployment and Informalisation · NCERT: Beyond NCERT
Meaning
An efficiency wage is a wage an employer pays above the market-clearing level. The market-clearing level is the wage at which the number of people wanting jobs equals the number of jobs on offer. The firm pays extra on purpose. Better-paid workers put in more effort, stay loyal and quit less often, so the firm spends less on hiring and training. Because wages then stay high instead of falling, some people who want work at that wage cannot get it. So efficiency wages are one cause of involuntary unemployment.
Example
In 1914, Henry Ford doubled pay to the famous "$5 day" to cut worker turnover in his car factories. In the Shapiro-Stiglitz model, a high wage stops workers from shirking (avoiding work), because losing such a well-paid job would hurt them.
Don't confuse with
- Minimum wage: a legal floor the government sets. An efficiency wage is the employer's own choice to pay more than the market wage.
Related concepts
- Voluntary unemployment
- Involuntary unemployment
- Frictional unemployment
- Structural unemployment
- Cyclical unemployment
- Technological unemployment
- Natural rate of unemployment
- Hysteresis
- Okun's law
- Labour arbitrage