Efficiency wage

An efficiency wage is pay set above the market-clearing level to raise worker productivity or reduce turnover. It can leave willing workers unemployed when employers do not lower wages.

Shirking model: A labor-market model in which workers may shirk when effort is difficult to monitor. Paying above-market wages raises the cost of job loss and discourages shirking.
Classical economics: An economic tradition emphasizing markets, production, and the allocation of resources. Efficiency-wage theory challenges the claim that flexible wages clear labor markets.
Labor market: The market in which workers supply labor and employers demand it. Efficiency wages describe employer pay-setting within this market.
Competitive labor market: A labor market in which competition and flexible wages tend to equate labor supply and demand. Its wage-clearing prediction contrasts with persistent unemployment under efficiency wages.
Labor turnover model: A model in which firms set wages partly to influence workers’ decisions to quit. Higher pay can reduce costly recruitment and training by lowering quits.
John Maynard Keynes: British economist whose work reshaped theories of employment and aggregate demand. Keynesian analysis made persistent unemployment despite wage adjustment a central problem.
Equilibrium wage: A wage at which the quantity of labor supplied equals the quantity demanded. The efficiency wage is defined relative to the wage that would clear the market.
Minimum wage: A legally mandated floor on the hourly or periodic pay employers may offer. Unlike efficiency wages, a minimum wage is imposed by law rather than chosen for productivity.
Adverse selection: A market process in which hidden differences in quality shape who participates in an exchange. A wage premium may attract a larger or more suitable pool of applicants.
Henry Ford: American industrialist who introduced a high five-dollar daily wage at Ford Motor Company in 1914. Ford’s wage policy became a prominent historical example of pay intended to stabilize and intensify work.

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