EFFICIENCY-WAGE THEORIES OF UNEMPLOYMENT
Efficiency wage theories are clearly non-Walrasian theories in as much as they postulate payment of wages that are higher than market-clearing wages. The persistence of unemployment follows as a direct consequence of higher wages. The efficiency wage theories rationalise the existence of higher than market clearing real wages.
Broadly speaking, firms pay higher than market-clearing real wages because the benefits accruing from higher wages are more than the cost of paying higher wages. The higher benefits can accrue for the following reasons:
i) At a very basic level, higher wages enable higher consumption for workers, including higher nutrition, and this is expected to increase the work capacig of the hired workers. The point is more valid at lower levels of standards of living than are prevalent in the developed economies.
ii) Higher wages may get into the pool of workers with a higher reservation wage, i.e., the minimum wage that should be offered to a worker to induce him to supply his labour on the market. Workers with a higher reservation wage are expected to have superior abilities along directions that cannot be I directly observed and duly compensated for on the market. These higher abilities in the pool of employed workers are expected to benefit the firm.
iii) A higher than market wage can build loyalg and a sense of belonging among workers and induce higher effort. This point is better understood in the context of the opposite situation of a lower wage, which is expected to have effects like generating anger and a desire for revenge, thereby leading 1even to a sabotage by the workers.
iv) At a more sophisticated level, a higher wage generates incentives for workers to avoid work-shirking behaviour in situations where the firms c cannot monitor the work effort perfectly. Workers do not want to be caught shirking in such valuable jobs, for they could be fired if caught shirking and may be able to replace the job, if at all, by one which pays only a market- clearing and hence a lower wage.
Some of the above ideas have been developed into more formal models in the literature. In the next Section you will go through one such model that analyses ithe determination sf efficiency wages.