This article includes a, but its sources remain unclear because it has insufficient. Please help to this article by more precise citations. (January 2010) () In, the efficiency wage hypothesis argues that wages, at least in some markets, form in a way that is not market-clearing.

Specifically, it points to the incentive for managers to pay their employees more than the wage in order to increase their or, or reduce costs associated with turnover, in industries where the costs of replacing labor are high. This increased labor productivity and/or decreased costs pay for the higher wages. Because workers are paid more than the equilibrium wage, there may be. Keith Sweat The Legendary Keith Sweat Rarity there. Efficiency wages offer, therefore, a explanation of unemployment, in contrast to theories that emphasize government intervention (such as ). However, efficiency wages do not necessarily imply unemployment, but only uncleared markets and job rationing in those markets.

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There may be full employment in the economy, and yet efficiency wages may prevail in some occupations. In this case there will be excess supply for those occupations, but some applicants are not hired and have to work for a probably lower wage elsewhere.

The term 'efficiency-wages' (or rather 'efficiency-earnings') has been introduced by to denote the wage per efficiency unit of labor. Marshallian efficiency wages would make employers pay different wages to workers who are of different efficiency, such that the employer would be indifferent between more efficient workers and less efficient workers. The modern use of the term is quite different and refers to the idea that higher wages may increase the efficiency of the workers by various channels, making it worthwhile for the employers to offer wages that exceed a market-clearing level. Contents • • • • • • • • • • • • Overview [ ] There are several theories (or 'microfoundations') of why managers pay efficiency wages (wages above the market clearing rate): • Avoiding shirking: If it is difficult to measure the quantity or quality of a worker's effort—and systems of or are impossible—there may be an incentive for him or her to 'shirk' (do less work than agreed). The manager thus may pay an efficiency wage in order to create or increase the cost of job loss, which gives a sting to the threat of firing. This threat can be used to prevent shirking (or ').

• Minimizing turnover: By paying above-market wages, the worker's motivation to leave the job and look for a job elsewhere will be reduced. This strategy makes sense because it is often expensive to train replacement workers. • Selection: If job performance depends on workers' ability and workers differ from each other in those terms, firms with higher wages will attract more able job-seekers, and this may make it profitable to offer wages that exceed the market clearing level.

• Sociological theories: Efficiency wages may result from traditions. Theory (in very simple terms) involves higher wages encouraging high morale, which raises productivity. • Nutritional theories: In, efficiency wages may allow workers to eat well enough to avoid illness and to be able to work harder and even more productively. The model of efficiency wages, largely based on shirking, developed by and has been particularly influential.

Shirking [ ]. In the Shapiro-Stiglitz model workers are paid at a level where they do not shirk. This prevents wages from dropping to market clearing levels. Full employment cannot be achieved because workers would shirk if they were not threatened with the possibility of unemployment. The curve for the no-shirking condition (labeled NSC) goes to infinity at full employment. The shirking model begins with the fact that complete contracts rarely (or never) exist in the real world.

This implies that both parties to the contract have some discretion, but frequently, due to monitoring problems, it is the employee’s side of the bargain which is subject to the most discretion. (Methods such as piece rates are often impracticable because monitoring is too costly or inaccurate; or they may be based on measures too imperfectly verifiable by workers, creating a moral hazard problem on the employer’s side.) Thus the payment of a wage in excess of market-clearing may provide employees with cost-effective incentives to work rather than shirk.

In the Shapiro and Stiglitz model, workers either work or shirk, and if they shirk they have a certain probability of being caught, with the penalty of being fired. Then entails unemployment, because in order to create an to shirking, firms try to raise their wages above the market average (so that sacked workers face a probabilistic loss). But since all firms do this the market wage itself is pushed up, and the result is that wages are raised above market-clearing, creating.

This creates a low, or no income alternative which makes job loss costly, and serves as a worker discipline device. Unemployed workers cannot bid for jobs by offering to work at lower wages, since if hired, it would be in the worker’s interest to shirk on the job, and he has no credible way of promising not to do so. Shapiro and Stiglitz point out that their assumption that workers are identical (e.g.

There is no stigma to having been fired) is a strong one – in practice reputation can work as an additional disciplining device.