ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If firms pay wages above the equilibrium level, it becomes more difficult for employees to find other jobs that pay equally well. As a consequence, they have an incentive to put in more effort to maintain their current job.

Detailed explanation-2: -If wages are below the equilibrium level, there is a shortage of labor and wages get bid up; if wages are above the equilibrium level, there is a surplus and wages get bid down. We move along both the labor supply and labor demand curves.

Detailed explanation-3: -The efficiency wage theory argues that some firms pay their employees wage rates above the equilibrium, increasing productivity as workers are motivated. It also helps firms avoid the challenges of adverse selection by attracting the most qualified employees for a role in the market.

Detailed explanation-4: -To boost productivity of workers, the efficiency wage theory assumes that firms need to pay workers more than the market-clearing wage. This then provides the incentive to workers to be as productive as possible, leading to an increase in the firm’s overall output.

Detailed explanation-5: -Efficiency wages offer a number of benefits, including lower turnover, higher morale, better job candidates, employee loyalty and trust and increased productivity.