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Articles for Reference:


 * Efficiency Wages in Argiculture
 * In relation to Austrian Economics

The Basic Concept of Efficiency Wages:

An efficiency wage will exceed the market clearing wage for a given occupation. The intended purpose of this decision is to provide the worker with an incentive to labor effectively by decreasing the propensity to shirk or behave poorly.

Scribbles
From the Article: PUTTING BEHAVIORAL ECONOMICS TO WORK: TESTING FOR GIFT EXCHANGE IN LABOR MARKETS USING FIELD EXPERIMENT

Efficiency wages may only have a noticeable effect for a limited duration, after which there is no discernible differentiation from the market clearing wage. Labor is like a commodity: There is a market clearing price for a which a worker is willing to put in the minimum effort required. It is further assumed that there is a positive relationship between increased wages and the effort that they put forth (reciprocity). Laboratory evidence supports this hypothesis (1366). It is questionable as to whether or not this holds true in actuality when duration and adaptation are brought into consideration. It appears that those offered higher wages (an efficiency wage) increased effort and productivity for a short time, only to sink to average levels later on. It is important to note that this is true in for a one-time work situation, not continued employment. It seems that higher wages may not improve productivity, but may help to attract and retain high quality workers.

From the Article: THE FAIR  WAGE-EFFORT  HYPOTHESIS  AND UNEMPLOYMENT*

Workers have an idea of the fair wage which is greater than the market clearing wage. They will therefore provide only a fraction of normal effort. The existence of efficiency wages provide a possible explanation for unemployment, as they exceed market clearing wages and limit the number of possible hires (likewise, the negative correlation between skill and unemployment). If a wage is below the perceived wage, the laborer will lower actual effort or adjust their non-pecuniary perception of the job. The effect of overpayment may be psychological rather than resulting in actual improvements in labor. Simply put, underpaid worker get angry. They may feel resentment towards higher paid workers and offer a declining level of service to customers if they interact directly. Inequity among workers can create strife, lower morale and productivity (particularly if they are of the same labor group). If a firm must pay high wages to one group of workers in order to attain skilled individuals, it is likely that wages throughout the firm will rise.

From the Book: Animal Spirts

Firms cannot fully monitor their employees; therefore workers can work or shirk. In an economy where there is no unemployment, there is no incentive to work. Firms pay extra, reducing shirking but resulting in unemployment. Falls in unemployment result in rises in shirking.

Alternatives to Efficiency Wages:
 * Seniority Rights: If a worker builds benefits during his tenure in a given occupation, he will be persuaded to work efficiently because all other jobs would not provide the same benefit.
 * Reputation: Educated workers may find that the cost of shirking is the cost of their education; job loss due to poor performance will result in difficulty finding work in any other firm because of a tarnished reputation.  The time any money spent on school will be useless in this situation.

It is likely that the relationship between an employee and the employer is more complicated that the simple exchange of a wage for labor. There is a sense of duty that laborers feel to complete their tasks. If they feel that they are being unfairly compensated, the will shirk or sabotage. If they feel they are being more than fairly compensated, they will fully buy into the goals of the company. Therefore, the decision of whether or not to shirk is dependent on the cost to do so and how fairly to laborer feels they are being treated.

Low or unfairly distributed wages will result in the sensation that necessary tasks do not fall on any specific individual (a result of complex interactions between laborers within the workplace.

Labor as a Commodity
Labor, being a good that can be traded, is very much a commodity. Like other tangible goods and services, there is a market clearing price for which the demand and supply for labor will be in equilibrium. However, this is the price for which a worker is just willing to trade his labor for income, meaning that only the minimal amount of effort will be exerted. In this situation, a worker may shirk responsibilities that are felt to be unwarranted at the market clearing price, or wage.

The theory of efficiency wages suggests that there is a positive relationship between wages which exceed the market clearing wage and the level of effort that a worker reciprocates to their employer. In turn, it is postulated that the effort and therefore productivity of a worker will increase along with their wages.

Basic Model
The basic concept of efficiency wages can be explained mathematically using the formula below. In order for a wage to increase the efficiency of a worker:

θ(α-β) > G

where:


 * θ represents the likelihood that a worker will be caught and punished for unsatisfactory labor
 * α represents the efficiency wage
 * β represents the going market clearing wage
 * G represents the value a worker places on providing only the minimum necessary effort

A worker will choose the benefit, G, of supplying the minimum level of effort his occupation requires in the case that their employer fails to provide a wage α large enough to render the risk of release, θ(α-β), greater than or equal to the benefit of slacking on the job. The efficiency wage α must exceed the market clearing wage β so that the cost associated with losing one's job is greater than the benefit of supplying minimum effort. If the wage α does not exceed β, a worker can simply move to a different firm within the industry and maintain a constant level of utility while enjoying the benefits of minimal effort.

Test
In an experiment organized by Uri Gneezy and John list, two mutually exclusive groups of individuals, say A and B, were asked to digitize a library's catalog. Both A and B were promised a wage of $12 an hour for six hours of labor. Upon arrival, however, group A was instead offered a wage of $20 an hour, 167% of group B's wage. Initially, the generosity of the wage was reciprocated by the individual laborers of group A- information processed by A exceeded that of B by nearly 25%, suggesting greater effort. After ninety minutes time, productivity slipped to levels which were indistinguishable from that of group B.