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

Human Resource Economics
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Human Resource Economics 1
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

Human Resource Economics 2
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

Human Resource Economics 3
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.