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Human resource economics PDF

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Running head: HUMAN RESOURCE ECONOMICS
Human Resource Economics
Name of the Student
Name of the University
Course ID
HUMAN RESOURCE ECONOMICS1
Introduction
Workers receive wage in return of their productive performance. In the labor market,
demand and available supply of labor determine the payable wage to workers. Market
equilibrium wage though indicates an efficient labor market scenario; employers however often
agree to pay an above equilibrium remuneration to enhance performance of workers. When a
higher wage is paid by the employers without any external force then this is called efficiency
wage (Ehrenberg & Smith, 2016). Many economic theories though support the rationale of
efficiency wage, there are some contradictory theories as well. The theory of backward bending
labor supply curve contradicts the theory efficiency wage after a threshold level of wage.
Review of past literature
Many studies have been conducted to analyze the wage structure in specific industries
and existing differences in wage level. Productivity of workers and standard of living differ
depending on their wage. Industries undergone several changes over time. With change in
industry’s structure employment trend changes and so is the wage (Shields et al., 2015).
Different theoretical models are developed to study the wage structure. The theories are then
reasserted with reference to real world evidences.
The inequality in wage structure is explained with a model called pay for performance.
The model suggests that higher wage indicates a higher incentive to work which induces workers
to put greater effort. This improves performance of workers in the form of increased
productivity. Skills of workers improve overtime in response to high wage (Altman, 2015).
Workers ability differs within firm resulting in a wage inequality across different industries.
HUMAN RESOURCE ECONOMICS2
A proposition in favor of equality in wage distribution is made by the equitable wage
theory. According to this theory poverty and income inequality increases the wage gap among
workers. The theory explains wage difference for differing job profile, state of the economy and
difference in firms’ structure. The equitable wage theory aims to reduce wage inequalities across
nations (Sikka, 2015) The theory might be appealing from perspective of social welfare but the
same is not true when viewed from an economic perspective. The scheme of equal wage
eliminates incentive for extra work leaving no room for improving productive performance.
Efficiency wage theory
Several factors contribute to persistent unemployment in the labor market. These factors
include legislation of minimum wage, people searching for new jobs and labor union bargaining.
Another effective explanation of above equilibrium wage and resulted unemployment is given by
the theory of efficiency wage (Dunlop & Segrave, 2016).In the economic literacy, the theory of
efficiency wage focus on exclusively explaining the relation between performance and pay. The
theory suggests that firms should give workers a wage higher than equilibrium wage. A higher
wage increase productivity, cohesiveness in the workplace, the sense of loyalty and
responsibility among the workers and reduces tendency of shirking. In contrast, wage below the
market clearing wage contribute to dissatisfaction among the workers leading to a negative
attitude towards work (Weiss, 2014) This hampers productivity and results in high turnover. The
efficiency wage theory is again supported by difference theoretical model which are briefly
discussed below
Health of workers:The simplest explanation of efficiency wage theory is improvement in health
of workers. This version of efficiency wage theory shows the direct linkage between health of
workers and offered wages. A high paid worker is able to afford a more nutritious diet. The
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