Do efficiency wages increase unemployment

Answer 1

The theory states efficiency, defined as a mixture of education and motivation, to be a key factor when employers set the wage rate to attract workers. In offering an 'efficiency wage', a wage higher than the market average, an employer aims to attract a better quality of worker.

Below is my explanation of this during inter-war (the period between WW1 and WW2) Britain experienced high unemployment.. below is an exert from a report i wrote.

"It becomes apparent that these offerings of a higher wage rate would not directly exist in the staple industries, where a huge pool of the unemployed were stationed, and wage rates were usually negotiated by unions, but rather in the more prosperous, non-unionised industries. The theory could help to explain, how the problem of the generallyhigh real wage rate, evident in the figures offered by Beenstock and also Broadberry, may have occurred. However the difficulty with this theory is evident in proving it to be more relevant to this period than any other. A thought experiment may help our understanding further.

Consider; an employer within a prosperous industry during the interwar period is trying to attract a worker. There is a sea of unemployed, but few meet the criteria which he requires for the position he is aiming to fill. His way of attracting an employee is to offer a wage rate slightly higher than the market average for that industry. Assume the 'new' industry requires a certain level of skill amongst the positions he is trying to fill. These skills take time to acquire, and thus if there is a shortage of people with these skills then an excess demand for this type of labour will occur. Therefore the employer may be forced to attract potential employees with a higher than market average wage rate. Now other employers in the same field take note, and start raising the wage rate that they offer in order to attain the skilled employees also. This evidence would suggest a greater amount of money would then be in circulation in these areas and thus localised inflation may occur, driving the nominal wage rates in these local areas upwards, whilst their relative local real wage rate would remain similar. This would be due to the prices in that local area rising at a similar rate to the nominal income increments; the process of localised inflation explainable by the circular flow of income. These workers could explain to a small extent the disequilibrium of the real wage rate in this period.

• The short answer in my opinion is YES