Exam (elaborations)
ECS2604 - Labour Economics (ECS2604) Assignment 1 Semester 01 Year 2022
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Exam (elaborations) ECS2604 - Labour Economics (ECS2604)
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ECS2604ASSIGNMENT 2
SEMESTER 1
YEAR 2022
UNIQUE NUMBER :626834
, Question 1
Use the efficiency wage hypothesis to discuss the statement: “under certain
circumstances a wage increase could lead to increase in productivity”. (10)
The efficiency wage hypothesis a wage increase that results in a productivity
increase at least equivalent to the increase in wages, which makes it advantageous
for the employer to pay higher rather than lower wages
Since higher wages may result in increased effort, reduced shirking and lower
monitoring costs, larger firms are willing to pay higher wages in line with their
greater ability to pay such wages. Smaller firms may have the same priorities, but
their opportunities to gain the benefits of efficiency wages are restrained by their
lower ability to pay higher wages. Furthermore, workers in larger firms may
indirectly share in the higher profits of larger companies by being paid higher wages.
Thus far wage increases have simply been compared to productivity increases, with
the implicit
assumption that there should be some relationship between high productivity
increases and high
wage increases if workers can increase their productivity, they should benefit
through higher remuneration. However, it is possible that this can work the other
way under certain circumstances a wage increase can lead to an equivalent
productivity increase.
Under certain circumstances a wage increase can lead to an equivalent productivity
increas, there are various reasons why this might be the outcome:
There are various reasons why this might be the outcome:
• Higher wages might enable (or induce) the employer to recruit employees more
carefully.
• A higher wage might make employers more willing to invest in their workers.
• Workers’ morale might improve due to their higher wages, and their
absenteeism might be lower because their opportunity cost of not working is higher.
• Workers’ nutritional and health levels might improve, positively affecting their
physical vigour and mental alertness.
• Workers might, at least in the short term, be motivated by the higher wages to
improve their productive effort. They might even do so over the long term if they
fear being dismissed from a well-paying job.
• Labour productivity might also increase as a result of wage increases if the
employer attempts to reduce the wage bill by becoming more capital intensive.
What is important is not whether productivity increases, but whether it increases by
more than the wage increase, i.e. whether the productivity improvement fully
compensates for the labour cost increase.
If this does indeed happen, it might be more efficient for the employer to pay higher
wages, as this might reduce the unit labour cost.
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