Efficiency Wage Theory and Pay for Performance: A Case Analysis on Jetstar Company

This paper discusses the Efficiency Wage Theory and its application in the case of Jetstar Company. It also explores the concept of pay for performance and its benefits. The report includes a literature review on Efficiency wage theories and application on a firm.

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Human Resource Economics
The aim of the paper is to reflect the key findings of economic literature which include the
effectiveness of pay for performance. The Fair work commission Australia has hired me as a
consultant to analyse the issues related to pay and performance. The report includes the literature
review on Efficiency wage theories and application on a firm.
Organisation: - Fair Work Commission Australia is independent government organisation
which works with the motive to regulate Australia’s workplace relations system. Moreover, it
operates the business under the Fair Work Act 2009. The major function of this independent
body includes the carrying out a range of functions that are related to the safety net of minimum
wages and employment condition which mainly focus on enterprise bargaining, industrial action,
dispute resolution, employment termination and other matters of a workplace (Australia
Government 2018). Along with this, the role of Fair Work Commission includes setting
minimum wages, bringing and changing the modern awards, approving the enterprise
agreements and acting as independent umpire in disputes which consist of unfair dismissal
claims (Fair Work Commission 2018).
The commission allows the individuals to come to a commission of they been through unfairly
dismissed, discriminated against the workers, victimised people who are treated unfairly under
the provision of the Fair Work Act of Australia. The fair work act is followed by the entire
organisation operating their policies effectively (Fair Work Ombudsman 2018). This will help
them in making the employees believe that they are effectively treated by the company.
Literature Review

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This section of the report draws the review of literature that is written by the different authors on
the concepts of Efficiency wage theory and its related concepts.
General Labour supply
According to Keynes 2016, 45 in the mainstream of the theories of economies labour supply
refers to as the total number of hours the employee wish to work at given real wage rate. The
author shares the review that labour supply curve of occupation and industry will be upward
sloping. This opinion was shared after considering the research that wage rise attracts the
workers towards the industry with the rise in the incentive of higher rewards. Considering the
viewpoint of another author Batt, and Colvin 2011, 701 the rise in the wage or salary in an
occupation helps in bringing the expansion on the supply of labour that mainly depends on the
elasticity of labour supply. In addition, the author reflected that there are numerous factors that
can affect the labour supply in the current market. Moreover, this is the fact that labour supply
depends on the industry to industry.
Backward Bending supply curve of labour
According to the Golden and Figart 2013, 150 in economics backwards bending supply curve of
labour is a graphical representation that reflects the situation in which as real or inflation
corrected and the wages rise beyond the certain level. Moreover, the employees will substitute
leisure for paid work time and accordingly the higher wages lead to decrease in labour supply.
Agreeing to the same, other Keeley 2013, 175 said that there are two effects that are linked to the
determination of supply of labour. These effects include substitute effect and income effect. In
substitute effect, the rise in the wages will make the employees shift to other industry where they
can get the high incentive. This might lead to the issues or challenges for those companies that

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fall under the industry whose wages are less. On the other hand, there is income effect in which
rise in the income will make the employee work for less number of hours.
(Source: Keeley, 2013)
This is the graphical representation of the Backward Bending supply curve of labour which
clearly shows the indirect relationship between the wage rate and hours worked by the worker.
Efficiency Wage Theory
According to Taylor and Taylor 2011, 69 the efficiency wage theory in terms of economics can
be explained that rise in the wages can lead to a rise in the productivity of employees or workers.
The theory states that the workers who are paid more than the level of equilibrium level will try
to put more efforts than workers who are paid the equilibrium wage or below. The efficiency
wage literature maintains that the company should offer their workers a wage rate that is above
the clearing rate of market.

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Considering the point of view of Weiss 2014, 55 paying employees a wage premium leads to the
rise in the workplace cohesiveness, productivity, employee loyalty and responsibility and a
decrease in shrinking. In addition, this can be said that efficiency wage model is also known as
shirking model. the author state that the model is based on assumptions that include that firms
require effort from their personnel that supports the company to produce goods and services, the
efforts of personnel is imperfectly observable and along with this, it is assumed that employees
who found to offer less than contractual level of effort would leave their jobs. In addition, the
personnel mainly get the utility from leisure and have an incentive to shrink on a job. The theory
was explained with the help of a diagram. The below-given diagram reflects that rise in the
wages contributes to increase the MRP (labour productivity).
(Source: Ehrenberg and Smith 2016, 252)
The decrease in the wages might reduce the efficiency that is put in by the workers in the work
that is done by them within the organisation. There are different reasons behind the efficiency

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wage theory which include the fear of losing jobs, loyalty, labour market, lower cost of
supervision, attracting higher quality labour and nutritional theories.
According to Zouari, 2010, shrinking model is considered as one of the most important models
which are a submodel of efficiency wage model. The model includes the different factors that
can lead to the impact on the ability of the firm to extract the efforts from the workers. Most of
the firms follow the efficiency wage theory in which this theory is similar. Therefore the firms
should pay the higher wages as this allows the company to give the quality workers when
monitoring is costly or difficult. Thus, this reflects that expectation for identifying the shrinking
is low. Firms should always ensure that they are able to maintain good terms with the employees
so that they can’t leave the organization.
According to the Ehrenberg and Smith 2016, this model includes several other submodels like
labour turnover model and this model reflect that they are workers who are likely to be more
reluctant towards quitting the jobs for a higher wage paid. This model is quite similar to that of
the shrinking model in terms of the formal structure. Moreover, the companies try to attempts so
that they can pay high relative wages to reduce the cost that is associated with the turnover that
can lead to equilibrium with wages in the excess of marketing clearing. The author reflects that
the major failure of this model is a market failure because the wage is playing a dual role in the
market. Along with this, this has been analysed that the model predicts that wages will high
where the hiring and training cost is formidable and this can be said that the premiums need to be
associated with the lower turnover rates.
Considering the viewpoint of another author Yellen 2013, 203 model offers an explanation for
the wage distributions within the same industry for the similar sort of workers. The workers who

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perform the same sort or type of functions involve the high wage-low turnover and low wage-
high turnover strategies. Along with this, another model is adverse selection model in which the
imperfect information by firms related to the abilities of the employees offers a selection
rationale for the efficiency wage payments. This model helps the workers within the form to
learn the ability of the workers. Author reflected that the performance bonds are one of the ways
through which the adverse selection problems can be resolved. If in case the company measure
the performance on the job, pay-for-performance scheme reduces the problem.
Another submodel of the effective way theory is a Sociological model in which the efforts of
workers depended on to believe that they are treated by the employer fairly or not. The
productivity of the worker is linked to the morale and feeling of loyalty towards the company.
According to the Katz 1986, 20 this can be said that the positive number of sociologically model
is based on the efficiency wage implications. This is the only reason due to which most of the
firms pay attention towards the perceived fairness and consistency of their internal wage
structures.
Union threat model is a submodel of EWT theory which shows that the companies generally face
the important diseconomies of scale while offering training and hiring the workers. The company
in the current era generally spend the amount on job search and relocation then they have to
bring the rise in age offer or reduce the quality for accepted applicants to replace a large number
of workers proactively (Guerrazzi and Sodini 2018, 65). The model is basically related to the
collective action which includes the cost of turnover to rise rapidly when the number of workers
is required to get replaced in the set time period. Along with this, collective action can offer the
workers with more bargaining power.

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Pay performance
According to the Daley 2012, 124 pay performances are formal compensation systems that are
linked with the organizational or individual performance. These systems are most effective when
they are based on the objective which measures the quality or quantity of performance. In simple
words, the payments are done to the employees for their effective performance within the
organisation because this performance helps the organisation in achieving the success of the
company. The efficiency of the payment model is totally depended on the three things which
include equity, efficiency and compliance.
Case analysis on Jetstar Company
The analysis of the literature review reflects the EWT support the organisation to motivate the
employees within the organisation which boost the performance. The company who is operating
the business in Singapore is Jetstar Company. The company is highly recognized in the market as
it provides the airline services to its customers. The company understand that the fair work
commission or act is important for the effective workplace environment. This is the obligation of
the Jetstar Company to follow the laws and regulations.
Efficiency wage theory reflects that the rise in the wages results in the increase in the
productivity of the company. Though, this theory might also lead to some of the challenges for
the Jetstar Company. The company making the payment to the employees according to their
work due to which the wages or payment differ from employees to employees that are present
within the organisation. Along with this, the payment for the performance is also followed by the
company as they know the value of their employees. The company faced the incident due to
which the employees of the company suffered. The implementation of the efficiency wage theory

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will contribute to improve the wage slab of the employees which is essential to maintain the
performance and for retaining the employees.
The company also faced the issues as they were fined for the breached of workplace laws. Jetstar
Company deducted the salary of their employees as they made the 6 cadet pilots responsible for
the training cost. The company agreed that they breached the fair work act and due to which they
got penalised. In the Singapore market, Fair Work Ombudsman's proceeded with the separate
legal proceedings against Jetstar Airways Pty Ltd. the company was liable for the amount of
$45,000 in Sydney as well as in Singapore market. This shows that they deduced the wages of
employees which was legal because the amount of training was not supposed to be deducted
from the salary of employees (Fair Work Ombudsman 2014). The issues which are faced by the
company after proper implementation of the efficiency wage theory within the organisation. This
theory helps the company in ensuring that the employees are motivated and providing effective
performance within the organisation. Considering the theory, Jetstar Company can bring the rise
in the wages which makes the employees work with the efficiency because this rise in wages will
help them in fulfilling the personal objectives.
Considering the applicability of the concept of pay performance, Jetstar Company provides the
reward and recognition to the employees when they perform well. The airline enjoys the benefits
and perks which include the insurance benefits, vacation policy, retirement benefits and other
monetary benefits (Jetstar 2018). Along with the company believes that energy and commitment
of employees is the key to success which is possible with the implementation of the rewards and
recognition system within the organisation. This is the way through which the employees feel
proud that they are contributing to the success. These reward and recognition make them
motivated towards the work which ultimately gives rise to their productivity (Dunlop and

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Segrave. 2016). The overall analysis reflects that the aim of the company is that better pay is
essential to attract and retain labour.
In the end, it can be concluded that the efficiency wage theory plays a vital role within the
organisation. Fair Work Commission Australia performs the operations in which they ensure that
they are performing their roles and responsibilities for the effective fair work wage. The major
concepts related to the wage act are discussed with the support of the research done by the
numerous authors. The concepts on which research is done include labour supply, backward
bending supply curve, efficiency wage theory and the pay-performance. The report mainly
focuses on the concept of the efficiency wage theory and its related models. In the end, there is a
review of the pay-performance concept which through light on the benefits that are essential to
pay to employees of the company when they ensure that they are doing quality and quantity
activities within the organisation that helps in improving the performance. The report also
reflects the applicability of the concept on the real world company that operates the business in
Singapore market. Jetstar Company operates the business and ensures that they follow the theory
which will help them in resolving the issues faced by the company. Along with the company
offer the incentives and other rewards which help the company in improving the employee’s
performance. This concept is known as the pay-performance concepts which contribute to
improve the performance of employees present within the organisation.

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References
Australia Government. 2018. Fair Work Commission.
https://www.australia.gov.au/directories/australia/fwc
Batt, Rosemary, and Alexander JS Colvin. 2011. "An employment systems approach to turnover:
Human resources practices, quits, dismissals, and performance." Academy of management
Journal 54(4): 695-717.
Daley, Dennis M. 2012. "Strategic human resources management." Public Personnel
Management. 120-125.
Dunlop, John, and Marie Segrave. 2016. The theory of wage determination. New York City:
Springer.
Ehrenberg, Ronald G., and Robert S. Smith. 2016. Modern labour economics: Theory and public
policy. New York: Routledge.
Ehrenberg, Ronald G., and Robert S. Smith. 2016. Modern labor economics: Theory and public
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Fair Work Commission. 2018. What is the Fair Work Commission?.
https://www.fwc.gov.au/disputes-at-work/how-the-commission-works/video-tour-of-the-
commission/what-is-the-fair-work-commission
Fair Work Ombudsman. 2014. Jetstar fined over breaches of workplace laws.
https://www.fairwork.gov.au/about-us/news-and-media-releases/2014-media-releases/february-
2014/jetstar-cadets-penalty

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Fair Work Ombudsman. 2018. The Fair Work Commission and us - what's the difference?
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difference
Golden, Lonnie, and Deborah M. Figart. 2013. Working Time: International trends, theory and
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Guerrazzi, Marco, and Mauro Sodini. 2018. "Efficiency-wage competition and nonlinear
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Jetstar. 2018. Like at Jetstar- Recognition and Benefits.
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Katz, Lawrence F. 1986. "Efficiency wage theories: A partial evaluation." NBER
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New Jersey: Princeton University Press.

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Yellen, Janet, L. 2013. “Efficiency Wage Models of Unemployment.” Journal of American
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