HR Economics: Analyzing Efficiency Wages and Labor Supply in Australia

This essay delves into the relationship between higher wages and increased efficiency, focusing on the agricultural sector. It examines the efficiency wage theory, which posits that firms achieve greater efficiency when wages exceed the equilibrium level, aiming to avoid shirking, minimize turnover, and boost employee effort. The essay also explores the backward bending supply curve, analyzing how rising wages can lead to a decrease in labor supply. The study further reviews cyclical fluctuations, wage differentials, and the reasons behind providing efficiency wages, such as minimizing turnover and encouraging high morale. Empirical evidence from the sales representative salaries at McDonald's and KFC in Australia is used to support these concepts, with suggestions for incentives and pay-for-performance strategies to motivate workers. The conclusion reinforces the importance of paying wages above the industry's efficiency level to avoid shirking and reduce turnover, while acknowledging the potential for a backward bending labor supply curve when wages become excessively high. The essay uses relevant literature to support its claims.

Running head: HR ECONOMICS
HR Economics
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The aim of the paper is to find the relationship between the higher wages and higher
efficiency. The sector which is chosen in the paper is the agricultural sector. The efficiency
wage theory states that firms will operate in a more efficient way and also in a more effective
way when wages will be paid above the level of equilibrium. Efficiency wages are applied in
order to avoid shirking, for minimization of turnover and sociological theories. Efficiency
wage also helps in increasing the effort of the employees.
The theory of backward bending supply curve states that in the period of inflation
when the wages rises beyond a certain level then in that case the people will be substituting
leisure for the paid work hours ("Efficiency Wage Model Of Unemployment". 2018).
Therefore, it can be stated that when high amount of wages is been provided it will lead to
decrease in the supply of labour. In the real world back ward bending of supply curve are
affected mainly by the substitution effect and the income effect. The efficiency wage also
states that when the employees are paid lower wages the highly efficient and the productive
workers will be then looking for jobs elsewhere. when the workers are paid more then it acts
as an incentive of not to look elsewhere for the work.
Shirking model: the shirking model postulates various factors which affects the ability of firm
to extract effort from the employees and also yields some predictions which concerns nature
of the unemployment and wage differentials. In case when worker does not want to work he
will still do the work in order to avoid being unemployed.
Literature review
Cyclical fluctuations related to efficiency wages: the model of the efficiency wage
states that there is a presence of cyclical fluctuations which also generates demand shocks.
The theories related to efficiency wage states that the firms can find it profitable for paying
wages which will be above the level of market clearing as wage premiums will also help in

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reduction of turnover of the employees (Taylor, Jeannette and Ranald Taylor). The evidence
on the wage differences in the industry states that there is presence of huge differences in
wages which is quite difficult to explain related to the quality of the labour.
Backward bending supply curve: the backward bending supply curve is both
theoretically significant and interesting and also contains important policy implications. In
this part it can be said that the income effect will always dominate the substitution effect.
Although a large number of studies shows that the hourly supply curve which does not have
any income effect will be sloping downwards.
The relationship between backward bending supply curve and efficiency wages: there
is a presence of a close relationship bet ween the backward bending supply curve and the
efficiency wage. As according to the theory of efficiency wage it is known that when
employees are aid higher than the market clearing level, they will perform better, however,
when the amount of wages is too high it will lead to decrease in the supply of labour.
Reasons behind providing efficiency wage to workers: there are several reasons for
providing efficiency wages to the workers which can be to avoid shirking, minimizing
turnover rate, for encouraging high morale and also for nutritional theories (Taylor, Jeannette
and Ranald Taylor 2011).The workers need to be paid in such a way so that they do not shirk
which will in turn also prevent wages from falling to the market clearing levels. Efficiency
wage are need to be paid to the workers in order to avoid the labour turnover rate.
Findings
The typical salary of the sales representative of McDonalds is around $46,000 and the
salary for the same post in KFC is A$20 which is paid on hourly basis. Now the minimum
wage of Australia is known to be around $17.70 per hour which states that as the workers are
paid above the minimum wage level, they tend to perform well in these firms. However, had

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they been been paid a huge amount for the work, they would have substituted work with
leisure which would in fact lead to backward bending labour supply curve. In order to
motivate the workers for performing well, wages can be slightly increased above the
efficiency level, and they could also be provided with huge incentives which will again
motivate them to work more .The incentives should be on the basis of pay for performance.
In order to conclude it can be said that workers in any particular firm should always
be paid wages which will be above the efficiency wage in the industry in order to avoid
shirking and reduce the labour turnover rate. However, it should also be kept in mind that in
case when the wages of any firm increase beyond a certain level, the workers will then
substitute leisure for worktime which lead to decrease in labour supply forming the backward
bending labour supply curve.

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Reference list
"Efficiency Wage Model Of Unemployment". 2018. American Association.
http://www.jstor.org/stable/1816355
"Higher Wages, Fewer Jobs? It's Not That Simple". 2018. ABC News.
https://www.abc.net.au/news/2015-01-29/koukoulas-higher-wages,-fewer-jobs-its-not-that-
simple/6052010.
"Nber Working Paper Series Efficiency Wage Theories: A Partial Evaluation". 2018.
Nber.Org. https://www.nber.org/papers/w1906.pdf.
Taylor, Jeannette, and Ranald Taylor. "Working hard for more money or working hard to
make a difference? Efficiency wages, public service motivation, and effort." Review of
Public Personnel Administration 31, no. 1 (2011): 67-86.