Explanations Behind the Efficiency Wage Theory

Macroeconomic Theory
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Macroeconomic Theory
The efficiency wage theory postulates that the labor productivity of a firm depends on the real wage that employees receive. In this case, cutting wages affect an enterprise’s productivity and might end up increasing the cost of labor. Indeed, I believe in the efficiency wage theory. For example, if we consider an economy that has perfectly competitive enterprises, the production function should be Q=F(e(w)N), where w refers to the real wage, e refers to the worker’s effort, and N entails the number of employees (Yellen, 1984). As such, a firm that wants to maximize its profits can hire all workers it wants at the wage of its choice. However, an organization should hire employees at the point where the marginal product is the same as the real wage.
The PowerPoint makes it clear that employees’ efforts increase with the real wage rate that they receive from the firm. The two primary factors that lead to this condition are moral hazard...