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Efficiency Wages
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Definition of Efficiency Wages: A higher than market-clearing wage set by employers to, for example:

  • discourage shirking by raising the cost of being fired
  • encourage worker loyalty
  • raise group output norms
  • improve the applicant pool
  • raise morale
Labor productivity in efficiency wage models is positively related to wage.

By contrast, consider models in which the wage is equal to labor productivity in equilibrium, or models in which wages are set to reduce the likelihood of unionization (union threat models). In these, productivity is not a function of the wage.


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