Tuesday 728

 Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 9 The Real Economy in the Long Run
Chapter 28 of 36 Unemployment
Section 18 of 21
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Here we consider four aspects of efficiency wage theory.
Each suggests a different explanation for why firms may want to pay above-equilibrium wages.
-1- worker health
-2- worker turnover
-3 - worker quality
-4- worker effort
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-1- Worker Health
Better paid workers eat a more nutritious diet so are healthier and more productive.
A firm may find it more profitable to pay high wages and have healthy, productive workers.
The worker health aspect of efficiency wage theory helps explain some unemployment in less developed countries where inadequate nutrition can be a problem.
In these countries firms may worry paying low wages would adversely influence their workers' health and productivity so they pay higher wages to workers.
But this higher wage payment causes a surplus of labor and unemployment because firms employ a few high-paid healthy workers rather than many low-paid unhealthy ones.
Worker health concerns are less relevant for firms in rich countries such as the United States where equilibrium wages for most workers are well above the level needed for an adequate diet.
In fact, obesity is the big problem among workers including those with low wages, not lack of food.
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-2- Worker Turnover
Workers quit jobs for many reasons, including to
· take jobs at other firms
· move to other parts of the country
· leave the labor force for child raising or retirement
The frequency with which workers quit depends on the incentives that affect them, mainly weighing the benefits of leaving the firm against the benefits of staying.
The more a firm pays its workers the less often its workers choose to leave.
This reduces employee turnover and the expenses of hiring and training replacements.
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employee turnover
jūgyōin kaiten (romaji)
従業員回転
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Some reasons for companies to pay efficiency wages:
-better worker health
-less worker turnover
-attract better quality workers
-workers make stronger effort
If efficiency wages are so good why don’t all employers pay efficiency wages?
ChatGPT:
Efficiency wages are not beneficial in every job because the higher pay must produce enough extra productivity or savings to cover its cost.
They work best when employee effort is difficult to monitor, training and turnover are expensive, or worker quality greatly affects productivity results.
In jobs where performance is easy to supervise, workers can be replaced or trained cheaply, and labor costs are a large share of expenses, paying above-market wages may simply reduce profits or force higher prices.
Efficiency wages can also attract too many applicants without guaranteeing the best workers will be selected, and companies can gain a profitability advantage if competitors raise wages.
Therefore, companies generally pay efficiency wages only when they have some certainty profit gains from stronger effort, better workers, improved health, and lower turnover will exceed the additional payroll cost.
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Does it make sense to pay someone $60 to mow your lawn if the market price for this service is $50? CGPT:
It can make sense if paying $60 produces benefits worth more than the extra $10.
For example, if the person is more reliable, does higher-quality work, takes better care of the property, or is less likely to quit.
That would resemble an efficiency wage.
However, for a one-time, easily inspected lawn-mowing job, there is usually little reason to pay above the $50 market price unless the worker provides additional value or you want to reward or help that person.