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Efficiency Wage Theory - PDF

   

Added on  2021-06-17

9 Pages1599 Words497 Views
Running Head: BUSINESS ECONOMICSBusiness EconomicsName of the StudentName of the UniversityCourse ID

BUSINESS ECONOMICS1Table of ContentsIntroduction......................................................................................................................................2Minimum wage rate and theory of efficiency wage........................................................................2Disadvantages and problem associated with binding minimum workers........................................3Recommendation.............................................................................................................................5Conclusion.......................................................................................................................................6Reference list...................................................................................................................................7

BUSINESS ECONOMICS2Introduction Minimum wage is the set legal minimum wage that firms need to pay to the workers.Wage is the remuneration given to the labour for delivering labour service. Like goods marketprices in the factor market is also determined from the market demand, market supply andequilibrium condition. Equilibrium wage often finds to be too lower to secure a stable livingstandard. The objective of setting a minimum wage is to provide workers minimum wage tosupport their living (Hirsch, Kaufman and Zelenska 2015). Such policy is also supported on theground that offering a high wage is often at the interest of firms as long as it increases workers’productivity. The paper critically evaluates policy of minimum wage in light of efficiency wagetheory.Minimum wage rate and theory of efficiency wage Analysis of equilibrium wage in the labor market suggest that equilibrium wage in themarket is determined from the demand and supply in the labor market. In this sense, wagebalances demand and supply in the market. However, equilibrium wage does not always prevail.Wages are often set above the equilibrium wage for various reasons. Government and laborunion often set wage above equilibrium level. The main objective behind minimum wage lawthough is to ensure a minimum payment the workers but it also intends to enhance productivityof workers (Meer and West 2015). The theory that relates higher wage to higher productivity isknown as the theory of efficiency wage. Firms might find paying a high wage is profitable for anumber of reasons. A high wage helps to reduce workers’ turnover. In most of the times, workers join newjobs without having proper training and experiences. Firms need pay additional sum of money

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