Question 7 Chapter 15 The theory of efficiency wages
Why might some firms voluntarily pay workers a wage above the market equilibrium, even in the presenc
... [Show More] e of
surplus labor? Check all that apply.
Paying higher wages encourages workers to be moreproductive.
Paying higher wages tends to reduce the average experience level of a firm's workers.
Paying higher wages helps workers to be healthier in somedeveloping countries.
Paying higher wages increases worker turnover.
Points: 1 / 1
Explanation: Close Explanation
Paying above-market wages may be profitable if the higher wages increase the efficiency of the firm's
workers (hence the term efficiency wages). Higher wages can enhance worker productivity in
several different ways. The wage at which labor supply equals labor demand may be consistent with a
malnourished diet in less-developed countries. In such economies, above-market wages may allow the
firm's workers to remain healthy and productive.
Paying higher wages can also reduce worker turnover. Fewer workers will choose to explore other labor
opportunities when a firm pays wages in excess of the prevailing market rate. Since new workers must
be trained, the reduction in worker turnover can reduce the firm's training costs. By encouraging
workers to stick around, the higher wages cause the experience level of the firm's workforce to rise.
More-experienced workers tend to be more productive.
Higher wages also attract a more qualified pool of job applicants. If the firm were to pay prevailing
market wages, more qualified workers might choose to steer clear of the firm in favor of other
companies offering higher-paying positions for which they are qualified.
Finally, higher wages may induce greater worker effort. In some firms, the costs of monitoring worker
performance are quite high. To deter shirking, a firm may decide to pay wages above the market
equilibrium. The higher wage will give workers an incentive to keep their jobs. A worker receiving a
relatively high wage will be reluctant to lose his or her job, which would mean being forced to settle for
less-lucrative employment elsewhere. [Show Less]