Explain why firms may offer a higher wage to workers than the equilibrium wage rate.

 Efficiency Wage Model/Theory of unemployment The efficiency wage model or theory states that if workers are paid keeping in mind their efficiency and such efficiency wage is greater than market wage rate, then there would be no unemployment. We know that equilibrium wage rate is set when demand for labour (DL) is equal to labour supply (SL). this wage rate is W* and employment level is L.

Suppose, firms like to pay w wage rate instead of w, then you can see easily that there is excess supply of labour and it will result in unemployment equal to Ls to Ld Now, a natural question arises, i.e. why do firms like to pay W instead of W*? The answer of this question lies in the following reasons.

. When firms feel that effort level of workers cannot be supervised easily or perfectly, then they may like to pay higher wages so that workers do not shirk from the work. Thus, to reduce the quantum of shirking of workers firms would like to pay higher wages.

. It is possible that W* is too low that workers cannot afford nutritional or good quality food due to which their efficiency/productivity will be affected adversely. Thus, to maintain good health of the workers firms may pay higher wages.

. To reduce labour turnover. If firms pay more than W, then it will increase opportunity cost of quitting jobs. Hence, workers would not like to quit jobs if they are getting W in a firm because they know that other will pay W*. 

. To insert sense of belonging in the minds of workers, firms pay higher wages.

. To increase motivation of workers for increase in productivity and efficiency.

Subcribe on Youtube - IGNOU SERVICE

For PDF copy of Solved Assignment

WhatsApp Us - 9113311883(Paid)