Effectiveness of Efficiency Wages-Free-Samples-Myassignmenthelp

Question: You are required to research this topic. Use the readings on Efficiency Wages (in LMS) to build up your essay. Answer: Introduction In the contemporary global scenario, employment is one of the issues of primary concern, as much of the welfare of the people and their life style depends on the condition of employment prevailing in the economy, which in turn also reflects the overall health of the economy of the country. With the changes in the overall economic structure in the international framework and in the global demographics, the employment sector has also undergone huge dynamics as the employment structure and has changed substantially. Therefore, it becomes important to look into the driving factors of the employment sector in an economy in general. Wage and wage structure of an economy and the policies prevailing regarding the wage regulation in the concerned economy, pose as one of the primary factors, which determine the overall dynamics in the employment sector. This is because much of the behavior of the workers and their willingness to stick to a job or to leave the same depend on the wage structure under the domain of which these workers fall. Wage is one of the primary factors, not only in deciding the behavior of the workers and their overall well being but also in determining the conditions of the enterprises in which they are employed and the overall economic structure of a country. This is mainly because the wage structure of a company determines how well the relationship between the employees and the employer is, which in turn plays a key role in determining the health and the long run prospects and profitability of the company. In this context, the report studies the literatures and scholarly works present regarding this issue of concern of wage structure and the effectiveness of Efficiency Wages, taking into account the economic theory behind the same and the implications on the overall performance of the employees, with the newly implemented concept of pay for performance being considered. One of the earliest and still persisting school of thoughts regarding wage structure is the Equitable Wage Theory, according to which, there should remain uniformity in distribution of wages, which in turn increases the overall welfare of the people in a society. However, this theory is heavily criticized on efficiency grounds, as according to this theory, the productivity based payment structure provides more incentives for workers, thereby increasing their efficiency and willingness to work, which is not supported by the former theory. The economic notion of Efficiency Wage Model is relevant to the above discussed pay for performance model as it suggests that keeping the wage a little above the equilibrium level increases the productivity of the workers, thereby increasing the overall benefit of the firms. There are, however, several debates regarding the credibility of the Efficiency Wage theory and the pay for performance concept and regarding to what extent these theories can be applied in reality. This is because of the presence of the concept of backward bending labor supply curve, which shows the tradeoff between wage and leisure hours. The economic notions of the Efficiency Wage Theory, the backward bending supply curve, the notion of pay for performance in contemporary employment scenario and the implications of all these on the employment dynamics in the global scenario, have robust literary evidences, which will be taken into account in the following section of the report. Literature Review As discussed above, with time the wage structure has changed in an overall basis as well as with respect to different geographical locations, which in its turn have immense implications on the overall growth and well-being of the regions and their residents. There have evolved several theories and notions regarding the wage structures which should prevail in the economies and their pros and cons, which try to analyze the same from different perspectives. Equitable distribution of wage theory One of the pioneers in the wage distribution mechanism is the theory of equitable distribution of wage. As has been discussed in the literary works of Onaran and Galanis (2013), the concerning issues of poverty in the world have their roots in the inequality in the distribution of wages among the different sectors of the society. These inequalities, mainly arising due to the difference in the nature of jobs and skills of the workers, can be reduced, as per the authors, by implementing a more equitable wage distribution in the economy. However, this theory, as proposed by the authors, has been severely criticized by another school of thought, which points out towards the lack of efficiency in the equitable wage distribution. This notion, supported by many economists and strategy planners, advocates the presence of fair inequalities of distribution of wages, which may increase the efficiency of the overall employment scenario and productivity of the economy. Wage inequality and Efficiency Wage Theory The views of Mueller, Ouimet and Simintzi (2015), oppose the views of equitable wage, by asserting the fact that equitable wage theory, though sounds normatively appealing, is practically not that applicable and there are reasons behind the presence of inequality in wages, to some extent. The inequality, as discussed by the author, is often intentionally kept in the firms, to encourage higher performance of the workers by paying higher for better performance. This, in turn, may be beneficial for the firms as better productivity of the workers and a more loyal workforce can actually increase the long-term prospects of the firms. Pay for Performance Theory Shields et al. (2015), argues in this context, in favor of the presence of ethical inequality in the pay structure, which points towards the feasibility of the pay for performance model. According to this notion, the model increase the willingness to work among the workers by providing them proper incentives and thereby increasing the productivity and the efficiency of the workers in particular and the company in general in the long run. Many other contemporary economists, who assert that pay for performance motivates the workers by providing financial incentives and make them willing to sacrifice their leisure to gain more monetary benefits by working more, support this view. Efficiency Wage Model The Efficiency Wage Theory, as is suggested by DiGabriele and Ojo (2017) supports the pay for performance model. According to this theory, if the wage in an economy is kept above the equilibrium level, to some extent, even when excess supply of labor is present in the economy, can be beneficial for the economy. However, the presence of this higher wage can lead to unemployment in the economy, combining with the presence of minimum wage system and labor unions in the economies in the contemporary global scenario. However, the efficiency wage theory is different because unlike the other two phenomena, this does not require any regulation from the government (Schmitt 2013). Arguments in favor of Efficiency Wage Workers Turnover - Weiss (2014) shows a direct relation between the wage structure and the turnover rates in the professional domain of the economy in general. Turnovers are generally higher in those firms and industries where the workers feel de-motivated due to the lack of monetary incentives and performance based payments. In this context, as suggested by the author, it is better to implement the efficiency wage, which may have positive implications on the company, by reducing the turnover rates of the workers in the same. Workers Health and Overall Well Being- Linde Leonard, Stanley and Doucouliagos (2014), draw a direct relation of efficiency wage and the health and welfare aspects of the workers and overall well being of the health of the economy of the country. Efficiency Wage, if implemented correctly, can increase the purchasing power of the workers, thereby increasing their scope of availing health care, which may positively affect their productivity, as healthy workers are supposed to be more productive. Shirking- Wages of the workers are also expected to have connections with the efforts which they give in their job (Kwon 2014). There are several jobs in which the workers have the options to decide how much productive they want to me. In these jobs, if pay for performance is implemented properly, the workers will feel more motivated to work and this may in turn reduce the problem of shirking, which is one of the most common problems in these kinds of jobs. Efficiency Wage and Motivation of the workers Fabris (2013) show the relation between efficiency wage and the motivational aspects in the workplace, in his working paper, with the help of a simple mathematical function. The author draws the effort function of the workers as follows: Ei = f(Wi/We, U) [We = Equilibrium wage, Wi = Wage received in the particular firm, U = Unemployment level in the economy] Here, the relative wage is therefore given by Wi/We, which if higher, motivates the workers in the same firm to work more, according to the author in this context. All the above discussed notions in favor of the practicality of the Efficiency Wage, advocates the implementation of the same. However, to what extent this should be implemented is a matter of concern due to the presence of countering assertions like the theory of the backward bending supply curve of labor. Backward Bending Labor Supply Curve Many economists, including Keeley (2013), point out that with the increase in the level of wages, though initially workers tend to work more, however, after some time, when the rate of wage is sufficiently high, the workers tend to substitute higher labor hours with leisure. This is because they become satisfied with the level of wage they are receiving and do not want to increase working even at higher wages. Leisure becomes more demanding then (Thuy and Flaaten 2013). This results in a backward bending supply curve of labor, which is shown in the following figure: Figure 1: Backward Bending Labor Supply Curve (Source: Mankiw 2014) The above figure shows that until W1, the workers go on increasing their labor hours in order to earn more money. However, after W1 is reached, the workers do not run behind increased wage anymore and they tend to be well off enough to afford to decrease their labor hours and increase the amount of leisure they want to enjoy. Thus, the backward bending supply curve theory of labor suggests that Efficiency Wage may not always work efficiently and it is required to regulate the extent till which this policy is implemented (Leigh and Blakely 2016). Empirical Support: Case Study of the Australian Economy The theories of the pay for performance model, the Efficiency Wage and the backward bending labor supply, though sounds highly practical and applicable apparently, need to be supported by the empirical findings in order to be considered to be practically applicable in the real case scenario. Keeping this in consideration, the primary question, which has to be addressed, with respect to the economy of Australia, is whether there exists a relation between the wage and productivity and the wage and unemployment scenarios in the concerned economy (Torry 2013). The Efficiency Wage theory does not get much support in the trends of unemployment in the Australian economy (McLachlan 2013). There are other important factors in the economy, like those of the business cycle dynamics and external phenomena, which may also affect the unemployment rates of an economy significantly and can be more prominent than that due to the increase in the wage rates in the economy. Perry (2014), takes different countries including Australia into account to show that the wage elasticity is 0.21 whereas the elasticity with respect to motivation is as high as 0.61, in the public sector, which implies that workers tend to get more inspired to work harder when motivated than when they get a hiked salary. Conclusion The Efficiency Wage Theory, as discussed above, does hold immense significance in the contemporary economy and there remains a huge scope of studying the implications and practicality of the theory in the real life scenario. This is because there are both positive as well as negative aspects of the implementations of the Efficiency Wage and Pay for Performance schemes, which may also generate different types of results in different economies, depending upon the external factors under the domain of economy. The motivation factor plays a significant role in the workplace scenario along with the wage hike. However, the presence of the labor supply curve of labor in the economy makes it important to regulate and properly implement the Efficiency Wage Model in the economy in real case scenarios References Criscuolo, Chiara, Peter N. Gal, and Carlo Menon. "The dynamics of employment growth." (2014). DiGabriele, Jim, and Marianne Ojo. "The efficiency wage hypothesis and the role of corporate governance in firm performance." (2017). Keeley, Michael C.Labor supply and public policy: A critical review. Elsevier, 2013. Kwon, Hyun Soo. "Economic theories of low-wage work."Journal of Human Behavior in the Social Environment24, no. 1 (2014): 61-70. Leigh, Nancey Green, and Edward J. Blakely.Planning local economic development: Theory and practice. Sage Publications, 2016. Linde Leonard, Megan, T. D. Stanley, and Hristos Doucouliagos. "Does the UK minimum wage reduce employment? A meta?regression analysis."British Journal of Industrial Relations52, no. 3 (2014): 499-520. Mankiw, N. Gregory.Principles of macroeconomics. Cengage Learning, 2014. McLachlan, Rosalie. "Deep and Persistent Disadvantage in Australia-Productivity Commission Staff Working Paper." (2013). Mueller, Holger M., Paige P. Ouimet, and Elena Simintzi.Wage inequality and firm growth. No. w20876. National Bureau of Economic Research, 2015. Onaran, zlem, and Giorgos Galanis. "Is aggregate demand wage-led or profit-led? A global model."Wage-led Growth: An Equitable Strategy for Economic Recovery, Basingstoke, UK: Palgrave Macmillan(2013): 71-99. Perry, James L. "The motivational bases of public service: foundations for a third wave of research."Asia Pacific Journal of Public Administration36, no. 1 (2014): 34-47. Schmitt, John. "Why does the minimum wage have no discernible effect on employment?."Center for Economic and Policy Research22 (2013): 1-28. Shields, John, Michelle Brown, Sarah Kaine, Catherine Dolle-Samuel, Andrea North-Samardzic, Peter McLean, Robyn Johns, Patrick O'Leary, Jack Robinson, and Geoff Plimmer.Managing Employee Performance Reward: Concepts, Practices, Strategies. Cambridge University Press, 2015. Thuy, Pham Thi Thanh, and Ola Flaaten. "The backward-bending supply curve in fisheries-revisited."Journal of Sustainable Development6, no. 6 (2013): 15. Torry, Malcolm.Money for everyone. Policy Press, 2013. Weiss, Andrew.Efficiency wages: Models of unemployment, layoffs, and wage dispersion. Princeton University Press, 2014.