Final answer:
Firms might pay above-equilibrium wages due to efficiency wage theory, where higher pay improves productivity and loyalty and reduces turnover costs. Unions also contribute to higher wages, which can affect employment levels and incentivize firms to outsource or relocate.
Step-by-step explanation:
Firms might pay wages that are above the equilibrium wage for several strategic reasons. According to efficiency wage theory, one central reason is that better pay can enhance worker productivity, as employees are likely to work harder and demonstrate greater loyalty if they perceive their salary to be higher than the market average. This can be seen as an investment, as the cost of paying higher wages can be offset by the cost savings from reducing employee turnover and the expense associated with hiring and training new workers. Furthermore, higher wages can serve as a deterrent against shirking, as employees recognize the value of maintaining their current position.
Unions can also influence wages to be above equilibrium levels. While higher wages may benefit union members, they can lead to a decrease in the quantity of workers hired. Unions have to consider the trade-offs between higher wages and employment levels, and be aware of the potential for firms to outsource or move operations to mitigate the power of unions.