Efficiency wage theory

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The efficiency wage theory is a theory in macroeconomics and describes the connection between the level of wages and the increase in productivity. Its purpose is to declare unemployment.

Definition of terms

The efficiency wage theory focuses on wage formation. In this approach, like the insider-outsider model , the wages are above the market-clearing level. It is questionable why the unemployed do not undercut wages in order to be able to keep their jobs. With the insider-outsider models, the employees prevent it. In the case of efficiency wage theories, it is companies that do not find it worthwhile to lower the wage rate to the level that clears the market. After all, it can still be worthwhile for organizations that behave in a profit-maximizing manner to pay higher wages, since these also represent an incentive function for employees in addition to a cost factor. This ambiguity of wages in relation to profit is the core idea of ​​efficiency wage theories.

The delimitation of the concept of the efficiency wage theory is related to the problem of rising unemployment . Since the oil crisis in the 1970s, the dangers of permanently high unemployment have been discussed in many countries. Other examples are the crisis of confidence caused by the implosion of the new economy or the fight against terrorism. Economists often assume that the persistently high unemployment has mainly structural and less cyclical causes. In the fight against structural unemployment, the first priority is to improve the functioning of the goods and factor markets, especially that of the labor market. In models based on the market economy, the phenomenon of involuntary unemployment can also be identified at this point: although people are willing to work for the given wage, their search for gainful employment remains unsuccessful. Wages are not falling, but are rigid at the bottom. This fact cannot be explained from a neoclassical point of view, since involuntary unemployment contradicts the goal of justice. The efficiency wage theories and the insider-outsider approach explain why this is so; namely, why there is no equilibrium that clears the labor market.

Models

The neoclassical evolved from the principles of classical economics. With it, the subjective theory of value acquired a dominant importance. The assumption of a general market equilibrium is fundamental to the neoclassical basic model . In the case of the neoclassical labor market, this lies in the leveling off between labor supply and labor demand. According to this, there cannot be permanent involuntary unemployment, as the market always creates a balance. In this assumption, unemployment is a consequence of excessively high wages. If the unemployed want to re-enter the labor market, their wages will go down until full employment occurs again. The neoclassical basic model therefore does not lead to the desired solution to the problem of unemployment, which is why the newer classical labor market theories - namely the efficiency wage theory and the insider-outsider approach - should provide a remedy.

Business perspective

Control costs

The importance of high control costs with unevenly distributed information or with contracts that cannot be verified by third parties is at the center of efficiency wage theory. If third parties, such as the labor court, cannot confirm the fulfillment of the employment contract, the companies will install other types of monitoring structures and, in addition to monitoring and control, also incorporate positive wage and career incentives to induce their employees to fulfill the contracts.

Recruitment costs

Hiring costs are understood as the effort that a company has to put in to hire new employees. These include search and selection costs, costs for professional training and for the socialization of the employee in the company. In general, it should be noted that each individual unemployed person incurs different recruitment costs, depending on which measures have to be initiated.

Fluctuation costs

These costs arise when employees join or leave the company. The costs are subdivided into redundancy costs or costs for the lay-off of personnel, recruitment costs and training costs. A personnel restructuring is therefore to be equated with high costs.

Relative wage equity

Relative pay equity means that an employee should be paid fairly compared to others. The "relative" refers to the comparison of different employees. This aspect is becoming more and more important. The wage distribution should therefore be made transparent and verifiable in order to be comprehensible for everyone. The principle of “equal remuneration under the same conditions” applies. In this regard, performance wages are a crucial point.

Definition and development of the efficiency wage theory

Neoclassical efficiency wage theories

With regard to the neoclassical, several variants of the efficiency wage theory emerged. On the one hand the Shirking variant , which deals with the problem of shirking employees. The other is the labor turnover variant . This looks for explanations for the fluctuation in companies. Finally, there is the adverse selection variant , which deals with the question of how companies can best find qualified personnel. These three variants are described in more detail later.

Sociological efficiency wage theories

These theories include the poison exchange approach and the fair wage model . The gift exchange approach sees the exchange of social aspects in the labor market as a “gift”, while the fair wage model deals with the question of fair wages. At this point, reference should be made to the statements by Akerlof .

Solow model

In this model Robert M. Solow explains how only technical progress can be the trigger for long-term economic growth in an economy. The Solow model can only explain the growth rate of an economy as a function of structural parameters such as the savings rate and population growth in the phase of adjustment to the long-term equilibrium. In the long term, i.e. on the equilibrium growth path, the income in the model only increases if an exogenous technical progress is also assumed.

Variants of the efficiency wage theory

Shirking variant

The Shirking variant deals with the problem of "shirking" employees in companies. The problem lies in the fact that the entrepreneur can record the proven skills of an employee, but not his physical willingness to perform. In their day-to-day work, employees often have the opportunity to create freedom in which they do not use their full potential. This is often not apparent to the employer. After all, the costs for the constant and complete control ( monitoring ) of the performance intensity of the employees are very high and not worthwhile for the entrepreneur. He only has the option to carry out spot checks. Of course, employees take advantage of this fact by simply strolling on without the risk of being dismissed. The only option for employers to counteract this loitering is to raise wages. Thus, incentives are created for the employees to exhaust their performance intensity.

Labor turnover variant

The focus of this variant is on reducing fluctuation and thus ensuring operational loyalty. Fluctuation plays an important role in companies. The proportion of inexperienced employees increases as the turnover rate increases. So there is a negative relationship. A high fluctuation rate results in high fluctuation costs for companies, as new employees have to be recruited and trained. To avoid these costs, companies need to make their workplaces more attractive. A higher wage is an incentive to stay longer in the company. In addition, employees who are willing to change shy away from dismissal due to the existing unemployment. The loyalty of employees to the company is strengthened. For these reasons, companies are not interested in lowering their wages to market clearing levels.

Adverse selection variant

In the adverse selection variant, the payment of efficiency wages is justified with the wish for a higher quality of the applicants. Companies are constantly on the lookout for qualified personnel to ensure productivity and to assert themselves among competitors. When selecting personnel, however, a crucial problem emerges, namely the question of whether one can make meaningful decisions based on the few application documents and thus find the perfect applicant. In order to facilitate the search for new employees, companies pay efficiency wages. This increases the number of applicants, which increases the chance of finding suitable staff.

Gift exchange variant

This variant is about the exchange of social interactions between employers and employees. Relationships in the labor market are seen as "gifts". Accordingly, employees are encouraged to do a higher job because they are "gifted" by the employer with a higher wage. This variant of the efficiency wage theory is aimed specifically at the working atmosphere and the motto: "fair wages for good work".

Case study

On January 12, 1914, the Ford Motor Company cut the daily working hours from 9 to 8 hours at one stroke and at the same time doubled the minimum wage from $ 2.34 to $ 5.00 for male workers over the age of 22 who had been with the company for at least six months. The main reasons for these measures were arguably to create incentives for higher productivity by reducing the turnover rate and absenteeism. Both aspects are central topics of efficiency wage theory. In fact, in an empirical study, Raff and Summers (1987) come to the conclusion that the Ford Motor Company's later experience with these benefits confirms the relevance of the efficiency wage theory - for example with regard to a significant improvement in productivity. Henry Ford later stated: "The payment of five dollars a day for an eight hour day was one of the finest cost cutting moves we ever made".

literature

  • Blanchard / Illing: Macroeconomics , 4th edition, Pearson Studium, Munich, 2006, ISBN 3-8273-7209-7
  • Bretschger: Growth Theory , 3rd edition, Oldenbourg, Munich, 2004, ISBN 3-486-20003-8
  • Franz: Arbeitsmarktökonomik , 6th edition, Springer-Verlag, Berlin / Heidelberg, 2006, ISBN 3-540-32337-6
  • Jasperneite: Labor market regulation and labor market development , Deutscher Universitäts-Verlag, Wiesbaden, 2001, ISBN 3-8244-0544-X
  • Kropp: Systematic Personalwirtschaft - Ways to networked-cooperative problem solutions , Oldenbourg-Verlag, Munich, 2001, ISBN 3-486-25702-1
  • Landmann / Jäger: Employment Theory , Springer-Verlag, Heidelberg, 1999, ISBN 3-540-65856-4
  • Mankiw: Macroeconomics , 4th edition, Schäffer-Pöschel, Stuttgart, 2000, ISBN 3-7910-1615-6
  • Sauer: Working Worlds and Gender Difference Incentives for Social Deconstruction in Political Future Concepts , Volume 1, Herbert Utz Verlag, Munich, 2004, ISBN 3-8316-0415-0
  • Stuhlmeier / Blauermel: Labor market theories - an overview , 2nd edition, Physica-Verlag, Heidelberg, 1998, ISBN 3-7908-1057-6

Web links

Individual evidence

  1. ↑ chair Meier / Blauermel: labor market theories - an overview , 2nd edition, Physica-Verlag, Heidelberg, 1998, ISBN 3-7908-1057-6 , S. 153rd
  2. ↑ http://www.nuernbergk.de/pdf/dienstleistungenlohn.pdf , p. 3.
  3. ↑ http://www.nuernbergk.de/pdf/dienstleistungenlohn.pdf , p. 4
  4. ↑ Sauer: Working Worlds and Gender Difference Incentives for Social Deconstruction in Future Political Concepts , Volume 1, Herbert Utz Verlag, Munich, 2004, ISBN 3-8316-0415-0 , p. 38.
  5. ↑ Archive link ( Memento from June 23, 2007 in the Internet Archive ), p. 7.
  6. ↑ http://www.uni-trier.de/fileadmin/fb4/prof/VWL/APO/4075ws0708/Folien_4.4.pdf , p. 3.
  7. ^ Kropp: Systematic Personalwirtschaft - Ways to networked-cooperative problem solutions , Oldenbourg-Verlag, Munich, 2001, ISBN 3-486-25702-1 , p. 305f.
  8. ↑ Bretschger: Growth Theory , 3rd edition, Oldenbourg, Munich, 2004, ISBN 3-486-20003-8
  9. ^ NBER: Did Henry Ford pay efficiency wages? (PDF file)
  10. ^ Franz: Arbeitsmarktökonomik , 6th edition, Springer-Verlag, Berlin / Heidelberg, 2006, ISBN 3-540-32337-6 , p. 325.