Efficiency wages are a way of providing incentives by paying workers above-equil

Question

Efficiency wages are a way of providing incentives by paying workers above-equilibrium wages. In 1914 Ford Motor Company made headlines by offering autoworkers $5 per day, up from $2.50 per day. At that time, the typical wage in manufacturing was just $2 to $3 per day.

What is the rationale for offering a higher-than competitive wage?

What are the pros and cons of paying an efficiency wage?

Is paying an efficiency wage a better idea than pay-for-performance? Why or why not?

Please elaborate with a detailed response

Explanation / Answer

Ans. This is a very interesting question.Let's begin the answer :

This question is in 3 Parts and I shall be answering all the parts in sequential manner.

PART 1 : There are different notions of different economists when it comes to offering a higher than competitive wage. Some argue that it is very essential because it induces the employees to improve their productivity. Some argue that it may lead to a disruption in the Competitive market and the workers who are paid less would not be able to work properly.

But we have to deal with the Rationale for offering higher wages than competitive wage. Providing higher wages helps the firm in getting more skilled and productive employees than they would have had before. It also induces the employees to work more harder as they don't have to worry about financial troubles. This strategy helps the firm in a lot of ways like it helped the Ford Company , the production and efficiency of Ford Co. rapidly increased after increasing the wages and slowly & steadily they became the global leaders. You may notice that the global firms like Microsoft , Google etc pay much more than the ordinary tech firms, even if designation is same. This is because they Hire the best of the Human Capital available.

PART 2 : Some of the Pros and Cons of paying an efficiency wage are as follows :

PROS

1) It helps the firm to get the Best manpower in the market because all employees from other companies would also ask for jobs in our company due to more wage.

2) Efficiency wages contributes towards improving productivity of the worker because worker would not be in any financial crisis and could contribute maximum to the production.

3) The efforts which are put in by the employee would increase because they would be trying hard to continue the current job because of more wages.

4) Employees health will also improve as the would be spending more money on their health than before. Hence Productivity will be boosted.

Cons :

1) The productivity of the workers who are in other organization and getting less pay would be on decline as they would feel demotivated.

2) Inequality of Income in the economy would also increase when concept of efficiency wage is applied.

3) Some workers from the other organizations would also start demanding higher wages and may go on strikes. This would lead to Chaos and tention.

4) The cost of production would also increase, which will make the products costlier and will effect the consumers.

PART 3 : Efficiency Wage and Performance wage , both are a crucial element in the wage selection Criteria . Both have their own merits and demerits. In my opinion , both the type of wage payment method should be used by the employers in an organization. This would help in maintaining stability in the organization. Performance pay can be used by the company ideally and efficiency wage can be used from time to time in order to boost the Morale of the Employees. This way , their performance and efficiency, both will grow simultaneously. Even the demerits of both of them would be removed by combining them.

I hope this answer was helpful to you. Do ask is any Doubts are left.

Best of Luck ! Keep Chegging !

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