Answer to Question #114010 in Macroeconomics for raashi agarwal

Question

Explain why employers pay a lower efficiency wage when unemployment is high. How would the efficiency wage change in an economy if it became easier to monitor the work that employees did? Other than to incentivise workers to put in effort, can you think of any other reasons why wages might be higher when unemployment is low (i.e. an upward-sloping wage-setting curve)?

Answer 1

Part 1.

Employers tend to lower efficiency wages even if the rate of unemployment is to scare away many job seekers from seeking employment that rewards low wage rates. Moreover, low wage rates for almost employers usually show the employees that there are no better vacancies to opt for but to maintain their current jobs assuring employers with more permanent staff at low wage efficiency. Low wage efficiency could also be used by employees to inspire workers of increased salaries when much experience is gained over time.

Part 2.

Increments in efficiency wage can be implemented when it is easier to determine the productivity of the employee. Industrious, skillful, and productive labor usually attracts remuneration to motivate workers that in turn result in increased production to take care of the cost incurred in rewarding them.

Part 3

·        Minimizing turnover, that is increasing the wage rate to reduce the motivation of workers to quit the job and seek employment elsewhere. This could be justified if it is expensive to train new recruits as replacements.

·        Avoiding shirking; for workers whose, efforts and abilities are difficult to determine and the measure could be given higher wages to motivate them to work to their full potential with pretense or doing less than expected.