Efficiency wage theory

The efficiency wage theory is a theory in macroeconomics and describes the relationship between wages and productivity growth. Their purpose is the explanation of unemployment.

• 4.1 Neoclassical efficiency wage theories
• 4.2 Sociological efficiency wage theories
• 4.3 Solow model

• 5.1 shirking variant
• 5.2 Labour turnover variant
• 5.3 Adverse Selection variant
• 5.4 Gift Exchange variant

Distinction between

The efficiency wage theory, the wage formation in the center. In this approach, is just the insider -outsider model, the wage is above the market-clearing level. The question is why the unemployed do not offer wages below to get to their jobs. The insider -outsider models, it prevent the employees. In the efficiency wage theories, it is the companies that do not find it worthwhile to reduce the wage rate to the market-clearing level. After all, it can be used for organizations that behave profit-maximizing, yet rewarding to be paid higher wages, since these also represent an incentive function for the employees in addition to a cost factor. This ambiguity of the wages in respect of the profit is the core idea of the efficiency wage theories.

The delineation of the concept of efficiency wage theory is related to the problem of rising unemployment. Since the oil crisis in the 1970s, the dangers of permanently high unemployment are discussed in many states. Other examples are the crisis of confidence by the implosion of the New Economy, or the fight against terrorism. Economists often assume that the persistently high unemployment especially has less structural and cyclical causes. In combating structural unemployment is the first place the functioning of product and factor markets to improve, especially the labor market. In models of market-based embossing may at this point also the phenomenon of involuntary unemployment are found: the people are indeed willing to work at any given wage, their search for work, however, remains unsuccessful. Wages do not sink, but are rigid downwards. This fact can not be explained from a neoclassical point of view, since involuntary unemployment is contrary to the objective of equity. The efficiency wage theories and insider -outsider approach to explain why this is so; namely why it does not come to an equilibrium in which the labor market is cleared.

Models

The neoclassical theory evolved from the principles of classical economics. With it, the subjective theory of value became a dominant significance. Fundamental to the neoclassical base model is the assumption of a general market equilibrium. In the case of the labor market it is in the balance between labor supply and labor demand. Thus, it can not come to a permanent involuntary unemployment, as the market always creates a balance. Unemployment is in this assumption, a result of too high wages. Want unemployed re-enter the labor market, they will go with wages down far enough to back full employment occurs. The neoclassical base model does not lead to the desired solution of the problem of unemployment, which is why the newer classical labor market theory - namely, the efficiency wage theory and the insider -outsider approach - to provide a remedy.

Business Perspective

Control costs

The importance of high monitoring costs for non-uniformly distributed information or if not verifiable by a third party contracts is central to the efficiency wage theory. Can third parties such as the Labour Court did not confirm the performance of the employment contract, the company will install other types of monitoring structures, in addition to the monitoring and control also build positive wage and career incentives to move their employees to fulfill the contracts.

Adjustment costs

Subsetting cost refers to the cost that a company needs to raise if it wants to hire new employees. These include search and selection costs, costs for the professional training and the socialization of the employee in the company. In general, it should be noted that for each different setting unemployment costs incurred, depending on the measures to be taken.

Turnover costs

These costs arise when employees go into the business or come out of him. There is a subdivision of the costs in firing costs or costs for staff release costs, recruitment costs and training costs. A staff restructuring is thus equated with a high cost array.

Relative wage justice

Relative wage justice means that an employee in comparison to other should be fairly compensated. Here it refers "relative" to the comparison of different employees. This aspect is constantly increasing in importance. The wage distribution is therefore designed to be transparent and verifiable in order to be understandable for everyone. It applies the principle of "equal remuneration in the same circumstances ". In this regard, the performance pay is a crucial point.

Definition and development of the efficiency wage theory

Neoclassical efficiency wage theories

With respect to the neoclassical several variants of the efficiency wage theory formed. Firstly, the shirking variant which deals with the problem of shirking by employees. Second, the labor turnover variant. This searches for explanations for the fluctuation in business. Lastly we have the Adverse- Selecion variant which deals with the question of how companies find the best qualified personnel. These three variants are described in more detail later.

Sociological efficiency wage theories

These theories include the poison - Exchange approach and the Fair Wage model. The Gift Exchange approach provides for the exchange of social aspects in the labor market as a "gift " while it comes to the question of equal pay for a fair balance model. At this point is to refer to the discussion of Akerlof.

Solow model

In this model, said Robert M. Solow, can be alone and technical progress of the trigger for a long- term economic growth in an economy such as unique. The Solow model can explain the growth rate of an economy as a function of structural parameters such as the savings rate and population growth only in the period of adjustment to the long-term equilibrium. In the long run, that on the balanced growth path, the income increases in the model but only if additional exogenous technical progress is assumed.

Variants of the efficiency wage theory

Shirking variant

The shirking version deals with the problem of " shirking " by company employees. The problem is that the entrepreneur indeed, but can not grasp its physical motivation, the reported ability of a worker. Employees have in their everyday work is often the ability to create free spaces in which they do not use their full potential. For the employer, this is often not recognized. Finally, the cost for the constant and complete control (monitoring ) of the power intensity of the employees are not very high and profitable for the entrepreneur. He has to carry out only the possibility of sampling. This fact make the employees naturally use by strolling without the risk of dismissal simply. For the countermeasures of slackness is only the possibility of wage increase for employers. Thus, incentives to exploit their power intensity for workers.

Labour turnover variant

The focus of this variant is the fluctuation reduction and thus the security of company loyalty. Fluctuation plays an important role in the companies. The proportion of inexperienced staff increases with increasing fluctuation rate. Thus, there is a negative relationship. A high turnover rate incurred by the company mainly high turnover costs, since new employees must be acquired and learned. In order to avoid these costs companies make their jobs more attractive. This provides a higher wage represents an incentive to stay longer in the company. Also, willing to change employee scare due to the existing unemployment back against dismissal. The retention of employees in the company is strengthened. For these reasons, companies are not interested in lowering their wages to the market clearing level.

Adverse- Selection variant

The payment of efficiency wages is justified on the basis of the adverse -selection model with the desire for a higher quality of applicants. Companies are constantly looking for qualified personnel to increase productivity and secure to hold its own among competitors. In personnel selection, however, crystallized a crucial problem, namely the question whether one can make meaningful decisions based on the few application forms and thus find the perfect candidate. To facilitate the search for new employees companies pay efficiency wages. Thus, the number of applicants, which increases the chance to obtain appropriate personnel increases.

Gift - Exchange - variant

In this variant it comes to the exchange of social interactions between employers and employees. Relations in the labor market are regarded as "gifts". Accordingly, employees are encouraged to provide a higher performance, as they are for " gifted " by the employers with higher wages. This variant of the efficiency wage theory therefore aims specifically to the work environment and the motto: "fair wage for good work " from.

Case Study

On January 12, 1914, the Ford Motor Company reduced at a stroke, the daily working time of 9 to 8 hours and at the same time doubled the minimum wage from 2:34 to 5:00 dollars for male workers aged over 22 years whose tenure were at least half a year. The main reasons for these measures were probably to create incentives for higher productivity by the turnover rate and the absence should be reduced from the workplace. Both aspects are central themes of efficiency wage theory. In fact, Raff and Summers come (1987 ) in an empirical study found that the later experience of the Ford Motor Company with these reductions, the relevance of efficiency wage theory confirm - for example in terms of a significant improvement in productivity. Henry Ford introduced later also stated: " The payment of five dollars a day for eight hour day on which one of the finest cost cutting moves we ever made".