Efficiency Wage Theory and Minimum Wage: An Economic Assignment

Running Head: ECONOMICS ASSIGNMENT
Economics Assignment
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1ECONOMICS ASSIGNMENT
Table of Contents
Introduction......................................................................................................................................2
Efficiency wage theory and minimum wage...................................................................................2
Increase in workers’ effort...........................................................................................................2
Reduction in workers turnover....................................................................................................3
Increase in quality of workers......................................................................................................3
Improvement in workers’ health..................................................................................................3
Limitation and problems with minimum wage................................................................................3
Strategic recommendation to new business.....................................................................................5
Conclusion.......................................................................................................................................5
References........................................................................................................................................7

2ECONOMICS ASSIGNMENT
Introduction
Wage is the return given to labor for participating in production process. Like goods
market, equilibrium wage in the labor market is determined by the interaction of labor supply
and labor demand. The equilibrium wage is often found to be lower to provide workers a
sustained living standard. Government then intervene in the labor market by setting a lower limit
to wages. The objective is to ascertain a minimum standard of living to the workers (Meer and
West 2015). Wage above the equilibrium wage is often gain support from the theory of
efficiency wage. The paper sheds light on minimum wage policy in reference to the theory of
minimum wage.
Efficiency wage theory and minimum wage
Efficiency wage theory provides a strong rationale for setting a legal minimum wage. The
theory states that it is possible for firms to operate more efficiently and increase productivity of
workers by offering them above that of equilibrium wage. There are different ways through
which firms can be benefitted from a higher wage (Card et al., 2018). These include increasing
work effort, lowering workers’ turnover, attracting high quality workers and ensuring a better
health and hence higher productivity for workers.
Increase in workers’ effort
The efficiency wage theory argues that when workers receive wage above the equilibrium
wage they put more wage than workers receive equilibrium wage do. Firms face difficulty in
monitoring work effort put by each workers and catch shirking behavior. If wages are low,
despite having risk of losing the jobs workers do not put sufficient effort (Weiss, 2014).
However, if a higher wage is paid then because of higher opportunity cost of losing jobs, workers