Efficiency wage: a wage above the equilibrium wage level in the labor market meant to make an employee as productive as possible.
Efficiency Wage Details
When an employer is looking for a suitable person to fill a position, they receive several applications. The employer is then faced with the problem of determining which applicants will be the most productive employees. Since it is not always easy to distinguish the productivity of candidates from an interview or resumé, the employer might end up hiring the least productive of the candidates who come their way.
The employer may perceive that a particular applicant is productive, but it might not turn out that way. In an ideal situation, only the employee knows their level of productivity and effort, which normally remain unknown to the employer. But, on the flip side, an employer would ideally know the lasting productivity of the employee. It's better for the company.
Therefore, an employer can control the level of effort of its workforce through the concept of efficiency wage. This concept involves increasing the remuneration of the workforce above the labor market value to attract a more productive workforce. It will also help reduce the time spent on the selection process, and your employee will want to remain in the organization for a long time. And when an employer pays his employees well, it will make the employees feel obligated to the organization and always give their best.
Example of Efficiency Wage
Let's say that the equilibrium labor market wage or salary for a salesperson is $1,800 per month. Andria, an experienced saleswoman, is used to receiving salaries of $1,800 per month. But of course, she'd like more. After so many years, she feels her work is worth more than average pay.
She applies for the same sales position in another company, and they offer her the job. The new company now pays her $2,200 per month as a salary. This motivates Andria. The increase in pay makes her feel recognized by the company, and she can see herself staying with them for a long time.
Significance of Efficiency Wage
Setting wages higher than the equilibrium wage would attract more productive workers who didn't necessarily want to apply for that position before. An employer that pays its employees well will always attract a quality workforce. This workforce will, in turn, raise the reputation of the company. This will also make the employees more motivated to give their best and feel obligated to do so for the company.
Another advantage of an efficiency wage is that it will push workers to work beyond their limits. Employers should want to give their best. Positive reinforcement in the form of money for work is a great way to give people a reason to work hard. It makes work seem "worth it." It also helps to retain employees who have been trained and have years of experience. This will help the company avoid the cost associated with hiring, training, and dismissal of employees.