According to Mankiw and Taylor (2008), efficiency in pay systems often means that organizations pay their employees more wages than the market- clearing wage with an intention of boosting their productivity. Therefore, since workers are paid more wages than the equilibrium wage, the unemployment rate is going to increase (p. They thus argue that efficiency in the labor market is considered as an explanation of market failure in relation to unemployment. Despite this argument, economists are of the view that organizations that have efficiency wages, that is, wages above the market-clearing rate, do not act out of a vacuum but rather there are some factors/ theories that influence them (Akerlof and Yellen, 996, p. These factors include the following: one, adverse selection; if the performance of a job depends on the ability of the worker and workers differ in abilities, organizations with higher pay rates will be in a better position to attract more able and competent job- seekers. An efficiency wage system gives employers the ability to choose and pick among numerous applicants in order to get the best ones possible. The second factor that prompts managers to adopt efficiency pay system is an intention to avoid shirking. Firms may frequently find it difficult to measure the quality and quantity of efforts of a particular work because the systems of commissions or piece rates may prove impossible and therefore there is a possibility of the employee to do less work than agreed (shirking). As a result, the firm may decide to pay an efficiency wage with an aim of increasing or creating the cost of job loss thereby giving a sting to job firing threat. The threat such as this can be used to avoid moral hazard or shirking. Thirdly, sociological factors have been cited in relation to efficiency wages; these wages may be because of the firm’s traditions. Akerlof and Yellen argue that the firm may have been using this system to enhance high morale among employees thus raising productivity
Akerlof, G., and Yellen, J, 1996, Efficiency Wage Models of the Labor Market, Cambridge University Press, 12- 40.
Bratton, J., & Gold, J, 2007, Human Resource Management: Theory and Practice, Hampshire: Palgrave Macmillan, p. 17- 80
Hume, D, 1995, Reward Management: Employee Performance, Motivation and Pay, Oxford: Blackwell Publishers, p. 30- 47.
Ito, H, 1999, The Effective Wage Rate, Labor Force Participation and the Rate of Return to Investment in Human Capital, South Economic Journal, Vol. 65, No. 4, p. 2- 12
Mankiw, G., and Taylor, M, 2008, Macroeconomics European Edition, Worth Publishers, p. 22, 37.
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