Criticism of the Efficiency-Wage Theory

Efficiency wages only works in the USA.

In all other countries there are significant protections against wrongful dismissal so it’s hard to get another job. In the USA, where firing is at will, it’s easy to risk taking on a problematic employee because they are easy to get rid off, the threat of dismissal is less severe because it’s easier to get another job. It’s not necessary to pay the wage premium because if you’re fired it’s hard to get another job so just chance of being caught shirking is strong penalty than in countries where it’s easy to get another job after being fired

Analyse Economique

The “Efficiency Wage” is a New Keynesian theory aimed to highlight a so-called market failure. Gregory Mankiw describes the theory as follows :

There are various theories about how wages affect worker productivity. One efficiency-wage theory holds that high wages reduce labor turnover. Workers quit jobs for many reasons—to accept better positions at other firms, to change careers, or to move to other parts of the country. The more a firm pays its workers, the greater their incentive to stay with the firm. By paying a high wage, a firm reduces the frequency of quits, thereby decreasing the time spent hiring and training new workers.

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