EFFICIENCY-WAGE THEORIES OF UNEMPLOYMENT 

Efficiency wage  theories are clearly non-Walrasian theories in as much as they postulate  payment of  wages that  are  higher than market-clearing wages. The persistence of unemployment follows as a direct consequence of higher wages. The  efficiency wage  theories rationalise the existence of  higher  than market clearing real wages. 

Broadly speaking, firms pay higher than market-clearing real wages because the benefits accruing  from  higher wages are more  than  the  cost  of paying higher wages. The higher benefits can accrue for the following reasons: 

i)  At a very basic level, higher wages enable higher consumption for workers, including higher nutrition, and this is expected to increase the work capacig of the hired workers. The point is more valid at lower levels of standards of living  than are prevalent in the developed economies. 

ii)  Higher wages may  get  into the  pool  of workers with  a higher reservation wage,  i.e.,  the minimum wage  that should be offered to a worker to  induce him  to  supply his  labour on the market. Workers with a higher reservation wage are expected to have superior abilities along directions that cannot be  I directly observed and  duly  compensated  for on  the market. These higher abilities  in the pool of employed workers are expected to benefit the firm. 

iii) A  higher  than market  wage  can  build  loyalg  and  a  sense  of  belonging among workers and induce higher effort. This point  is better understood in the context of the opposite situation of a lower wage, which is expected to have effects like generating anger and a desire for revenge, thereby leading 1even to a sabotage by the workers. 

iv) At  a  more  sophisticated  level, a  higher wage  generates incentives  for workers  to  avoid work-shirking behaviour  in situations where the firms c cannot monitor the work effort perfectly. Workers do not want to be  caught shirking in such valuable  jobs, for they could be  fired if caught shirking and may be  able to replace  the job,  if at all, by  one which pays only a market- clearing and hence a lower wage.  

Some of the above ideas have been developed into more  formal models  in the literature. In the next Section you will go through one such model that analyses  ithe determination sf  efficiency wages.