Efficiency wages
The theory of efficiency wages finds it can be profitable for a firm to pay higher wages because it entices workers to be more productive. Higher wages may reduce worker turnover because workers may be more satisfied with their jobs. Productivity is increased because worker effort increases and a more quality product is built. The firm may also be able to hire more skilled or higher quality workers because the job is more appealing. The downside to efficiency wages is that they create a surplus of labor, so the unemployment rate increases.
The main goal of firms is to make a profit, and to do so good workers are need. In this case why aren’t efficiency wages heard of more frequently? In the United States, even rather low-level jobs pay above minimum wage because it makes the company more enticing to workers. Still, a job with a low wage doesn’t lead to a high standard of living if one is supporting themselves off that job alone.
Companies that send factories to other nations do so in part to escape having to pay efficiency wages. For example, Mexico doesn’t have as many opportunities for jobs, so for many workers any job is a good one, even if they don’t have good conditions or pay. These companies don’t have to worry about enticing more skilled workers because they are looking to keep costs down, and Mexico has who have a large labor supply. These companies also don’t have to worry about quality products because consumers are looking to keep money in their pockets, as opposed to looking at how long the product is going to last.
Although the theory of efficiency wages sounds like it improves the situation of firms and workers, certain conditions need to be in place, such as a large supply of firms that need employees. This way there is competition for companies to get workers. Consumers also need to demand a quality product, because then companies need to pay higher wages so that they have happy, productive workers. I personally support efficiency wages being more widespread, but this seems unlikely, as many firms today compete with other firms by having the lowest prices as opposed to the best product.
