Question

Efficiency wages

a. increase productivity but increase unemployment.
b. decrease productivity but reduce unemployment.
c. increase productivity and reduce unemployment.
d. decrease productivity and increase unemployment.

Answer 1

Efficiency wages are theorized to boost productivity by paying workers above-market rates, but they can also lead to higher unemployment as wages may continue to rise even when productivity does not. Over time, however, unemployment levels tend to normalize as wages adjust to reflect true productivity levels. The correct answer to the question is a. increase productivity but increase unemployment.

Step-by-step explanation:

Efficiency Wages and Their Impact on Productivity and Unemployment

The concept of efficiency wages posits that by paying workers a wage that is above the market equilibrium, employers can incentivize higher productivity and lower job turnover. However, there is a trade-off to consider between productivity and unemployment when implementing efficiency wages.

When productivity is rising, as in scenario (a), there is an increased demand for labor, driving wages up. However, if productivity stops increasing and wages continue to rise due to delayed adjustment in expectations, the supply of labor exceeds the demand, resulting in unemployment. Employers who continue to pay these higher wages may do so under the belief that it will ensure a more productive and stable workforce, even though the immediate effect is an excess supply of labor, thus increased unemployment.

In contrast, scenario (b) illustrates a situation where productivity has been stagnant but then rises unexpectedly. If wages do not immediately adjust upward in response to the increased productivity, the result will be an excess demand for labor at current wage levels, leading to low unemployment.

Overall, in both cases, wages and productivity do tend to align over time. Therefore, the answer to the question about the effects of efficiency wages is a. increase productivity but increase unemployment. Efficiency wages can lead to increased productivity because they incentivize workers to perform better, but they also can result in higher than equilibrium unemployment if wages are kept high regardless of the changes in productivity.

It's important to note that over time, as employers and workers adjust their expectations, the levels of unemployment will gradually align with the new productivity norms, as wages adjust to more accurately reflect productivity levels.

Answer 2

Efficiency wages are higher than market equilibrium wages and are intended to boost worker productivity. They can lead to higher productivity but also result in increased unemployment as the labor supply exceeds demand. The correct answer to the question is option (a): efficiency wages increase productivity but increase unemployment.

Step-by-step explanation:

Efficiency wages are wages that are higher than the market equilibrium, paid by employers to enhance worker productivity and efficiency. The theory behind efficiency wages suggests that by paying higher wages, employers can increase worker productivity and loyalty, leading to better work performance and potentially lowering turnover rates. However, efficiency wages can also lead to increased unemployment since, at higher wage levels, the quantity of labor supplied exceeds the quantity demanded in the market.

Looking at the impact of productivity shifts on employment, when productivity unexpectedly rises, employers may be slow to adjust wage levels, resulting in a situation where the demand for labor exceeds the supply, causing unemployment to decrease. Conversely, if productivity stops increasing unexpectedly and wages continue to rise due to previous expectations, the quantity of labor supplied can exceed demand, creating unemployment.

Over time, wages generally adjust to reflect changes in productivity levels. In scenarios where productivity remains unexpectedly low for some time, unemployment levels tend to be higher on average. On the other hand, when productivity is unexpectedly high, unemployment levels tend to be lower on average.

In relation to the provided question, option (a) increase productivity but increase unemployment is the correct answer. Efficiency wages can increase productivity by encouraging better performance and reducing turnover, but by exceeding the equilibrium wage, they also tend to create a surplus in the labor market, therefore increasing unemployment.