Wednesday 729

 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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-3- Worker Quality
Firms want talented workers but because firms cannot perfectly gauge applicants’ quality hiring is somewhat random.
When a firm offers a high wage it attracts better workers to apply for its jobs thereby increasing the quality of its workforce.
If the firm offers an equilibrium level wage the most competent applicants may choose not to apply because they are more likely to have better opportunities than less talented applicants.
If this influence of the wage on worker quality is strong enough it may be profitable for the firm to pay a wage above the equilibrium level.
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-4- Worker Effort
In many jobs workers have some discretion over how hard they work.
Not everyone is ambitious and naturally a hard worker.
Firms monitor efforts of their workers and workers caught shirking are disciplined or fired.
But not all shirkers are immediately caught because monitoring workers is expensive and imperfect.
One way to deter shirking is to pay wages above equilibrium level.
High wages
· make workers more eager to keep their jobs
· give workers an incentive to make their best efforts
If the wage were at the equilibrium level workers would have less reason to work hard because if fired they probably could quickly find new jobs at the same wage.
Therefore, firms may raise wages above the equilibrium level incentivizing workers not to shirk.
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incentive to work hard
isshōkenmei hataraku dōki
一生懸命働く動機
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Increase worker health, decrease worker turnover, attract high-quality workers, and improve worker effort. Are there reasons other than these for firms to pay higher than equilibrium wages? ChatGPT:
Yes. The textbook’s four explanations are the main efficiency-wage reasons for paying above-equilibrium wages, but firms may have other reasons:
-Reduce theft, fraud, or rule-breaking. A well-paid employee has more to lose if dismissed.
-Increase loyalty and morale. Workers may respond to unusually good pay with stronger commitment and cooperation.
-Protect firm-specific knowledge. Higher wages can help retain employees who understand specialized equipment, customers, or procedures.
-Maintain a reputation as a desirable employer. This can make future recruiting easier and reduce hiring costs.
-Discourage unionization. Some firms pay above-market wages to reduce the attraction of unionization.