Question
Which labor market outcome is consistent with the
Efficiency Wage Theory?Solution
Efficiency Wage Theory posits that productivity (effort) is positively related to the wage paid. Firms may find it profitable to pay a wage above the market-clearing level for several reasons: · Reduced Shirking: Higher wages increase the opportunity cost of being fired, incentivizing workers to exert more effort. · Reduced Turnover: Workers are less likely to quit, saving the firm recruitment and training costs. · Improved Quality: Higher wages attract a better pool of applicants. Crucially, this can lead to involuntary unemployment because the high wage rate (set by the firm) creates a labor surplus.
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