Question

Suppose Jack Roper pays his employees $19.25 per hour at his organic rice packaging plant. He does this even though the market rate for this type of work is only $12.50 per hour. What economic explanation can you give for this?

Answer 1

In my opinion Jack believes in the efficiency wage theory. This theory states that an increase in wages will increase labor productivity, lower staff turnover and attract the best possible employees.

So when Jack increases his employees' salaries, their increased productivity will recoup the extra labor costs. At the end, Jack believes his profit will increase because of the higher wages he pays.