Efficiency Wages and the Cost of Job Loss

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The idea of efficiency wages forms the core of a strand of thinking about why it is optimal for firms to set wages permanently above the levels that would clear the labor market. Efficiency wages apply to various theories, including hiring decisions, productivity, and worker turnover. The theory of efficient wage implies that employers may find it advantageous to pay higher wages so that working is clearly a superior alternative to being laid off. This paper seeks to discuss the various issues behind the efficiency wages.

Employers are said to pay efficiency wages to increase the cost of job loss and increase the effort and intensity of work. Explain.

The cost of job loss refers to the loss of income employees experience when laid off by their employers (Bowles et al. 299). Increased wages raise the cost of job loss and motivate workers to put more effort into their work. Higher wages that are above the worker’s opportunity cost motivate them to work and secure their jobs at the same time. Workers are likely to give greater effort if they feel they are being well rewarded and that the cost of losing their job is high. Efficiency wages attract dependable workers with long term orientation.

Low wages make workers be indifferent between staying and losing their jobs. According to Bowles et al. (299), when the wages are so low, the workers will prefer not to work. In some case, employed individuals can decide to quit their jobs (Bowles et al. 299). Therefore, when the wage rates are high, the cost of job loss increases among employees.

How do employer actions and government policies impact on the cost of job loss?

Employer’s actions and government policies affect the cost of job loss in various ways. For instance, when employers set high wages, they directly raise the cost of job loss. Bowles et al. (297) argue that high wages minimize the incentives for workers to seek other high paying jobs. Setting decent working conditions also raises the cost of job loss because workers feel more secure and, therefore, prefers to go to work than to stay at home.

On the other hand, government policies also have a direct impact on the cost of job loss. According to Bowles et al. (297), government policies such as minimum wage Legislations and favorable working environment can raise the cost of job loss. If the government imposes a minimum wage above the equilibrium market wage, the market wage rates increases. A high wage rate raises the cost of job loss. Therefore, workers are motivated to work when the government sets a minimum wage above the market wage.

Bowles, et al, argues, however, that efficiency wages will only be paid in bureaucratically controlled workplaces. Explain.

According to Bowles et al. (312), bureaucratically controlled workplaces have a set of explicit rules that govern workers activities. Employers in bureaucratically controlled workplaces impose rules to govern employee performance. Since workers in bureaucratically controlled workplaces have clearly defined jobs, it is easier to identify each worker’s contribution to the success of the company.

Workers in bureaucratically controlled worked place can be discouraged to work well by the strict sets of rules imposed on them by their employers. Therefore, employers must reward their employees with efficiency wages to them in the workplace. As a matter of fact, when workers are paid high wages, they are motivated to work even when rules governing their workplace are extremely tight. Efficiency wages, therefore, motivate workers in bureaucratically controlled workplaces to keep their jobs.

How does the social organization of work affect the wages paid for different jobs?

Bowles et al. (314) define the social organization of the workplace as to how employment conditions are defined. In a social organization, a delegation of supervisory power, assignment of work task, and organization of other social aspects of the workplace are carried out by the managers. Social organizations act as a system of control in the workplace. Bowles et al. argue that the main objective of employers is to maximize profit. Since their objective is to maximize profit, employers introduce a set of rules and regulation that control worker’s performance at the workplace. Employers introduce this set of rules information of social organizations.

The social organization of work affects the wages paid for a different job in various ways. For instance, when employers decide to reward hardworking employee and charge lazy employees, it will directly affect the wages of these employees. The rewarded employees will receive high wages while fined employees will receive low wages. Therefore, workers in different jobs will be paid different wages according to their level of performance in the workplace.

Conclusively, though Bowles et al. argue that efficiency wage can only be paid in a bureaucratically controlled environment, it is necessary to note that even firms in capitalism can introduce efficiency wage depending on their firm’s objectives.

Works Cited

Bowles, Samuel, Edward, Richards and Roosevelt, Frank. Understanding Capitalism: Competition, Command, and Change, Third Edition. New York, NY: Oxford University Press, 2005. Print.

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Efficiency Wages and the Cost of Job Loss

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