Efficiency Wages And Workforce: Importance And Implications For Organizations

The Concept of Efficiency Wages

Question:

Discuss about the Marketing Issues and Commercial Players.

Workforce is drawing in and holding the ideal individuals, with the correct aptitudes and abilities, to meet present and future business prerequisites. It likewise implies having a high state of engagement and inspiration among workers, with the goal that they can convey on the guarantees businesses convey to clients.

Workforce is a key need for employees any company is possessing and the procedure followed to maintain workforce is:

• Attract and hold the perfect individuals.
• Assess and grow human capital.
• Build a strong, connected with and high performing workforce.
• Maintain work/life adjust

Evaluating and rising human workforce implies that investing in talented employee will ensure in an organization success and growth in long term. It's about evolving workers to stretch their full latent so which help in becoming future leaders. This can be done by paying them equilibrium wages to efficient employees of the organization.

While the economic theory of wage theory explains that pay level in any company should be determined according to the supply and demand of employees. The actual pay can differ significantly from one organization to another. In detail, it can be said that an employee will not leave the organization if he is pad the wage level above the market level (Polivka, Cohany & Hipple, 2010). Moreover, he will work harder if he is paid according to his work performance at the higher rate. It also implies that paying efficiency wages will serve to a company as the bonus because company need not hire new employees for the position. This is the principle reason of company paying higher than market rate to its employee to retain its efficient employees.

Much of the time, employees don't reach on another activity knowing that they should have skills and capability to think about that particular designation included how to function successfully inside the association and any more. According to Jacobs & Hawley, (2009) along these lines, firms invest a considerable amount of energy and money getting new representatives up to speed with the goal that they can be completely beneficial at their employment. Moreover, firms spend a great amount of budget in hiring and selecting new employees. According to Weiss, (2014) lower turnover leads to decrease in the expenses related to selecting, employing, and training, so it can be advantageous for an organization to offer incentives which will indirectly diminish turnover.

Paying employees more than the equilibrium pay for their work performance implies that it is more troublesome for employees to discover proportional pay if they plan to leave their current organization (Mortensen, 2010). This combined with the way that it's additionally less appealing to leave the present co-workers or switch organization when compensation is higher, implying that higher than equilibrium compensation give employees an incentive to remain with the organization that is offering them better financial support.

Benefits of Efficiency Wages

The hypothesis says that salary higher than equilibrium raises employees’ health and subsequently their efficiency. According to Burdett, Carrillo?Tudela & Coles, (2011) the logic behind this is a higher pay enables workers to care more for themselves such as nourishment, rest, feelings of anxiety, and many more factors. This builds their personal satisfaction and results in better complete health.

Businesses profits by a rise in the health of employee on the basis that sound workers are more beneficial than employees who are fragile (Grossbard, 2015). Also, they are lesser chances of them for going on sick leave and their human services costs are also lower. Moreover, in developed economies, this hypothesis is giving less preference, in light of the fact that most employers pay enough to help a sound way of life even on the equilibrium level. And it is fact that in developing economies many individuals still fight to make a fit living even they are employed full time.

As per the Efficiency Wage Theory firms can work all the more effectively and turn out to be more profitable if they pay compensation over the equilibrium level. According to Ransom & Oaxaca, (2010) there are four distinct hypotheses that figures out how firms can profit by paying higher compensation: higher employee determination, lower worker turnover, appealing experienced employees, and more healthy employees. The first hypothesis proposes that employees who are paid over the equilibrium level will invest more efficiency than employees who are paid lower salary or at an equilibrium level. The second hypothesis expresses that a salary over the balance level lessens unreasonable worker turnover (Mitman & Rabinovich, 2011). The third concept proposes that higher wages draw in more talented and higher quality representatives.  And the last hypothesis recommends that wages over the equilibrium level raises the workers’ health and accordingly their efficiency.

Greater than equilibrium pay will surely bring about the higher efficiency of the employees that an organization contracts. Higher employee’s quality comes by means of two pathways, firstly through higher wages raises the general quality and capacity level of candidates for the activity and helps in winning the trust of most capable employees away from competitors. (Higher wages raise quality under the assumption that better quality employees have better outside circumstances that they choose.)

The last piece of the efficiency-wage theory is that workers exert more effort (and are hence more productive) when they are paid a higher wage. Again, this effect is realized in two different ways: first, if a worker has an unusually good deal with her current employer, then the downside of getting fired is larger than it would be if the worker could just pack up and get a roughly equivalent job somewhere else. According to Galí & Monacelli, 2016) If the downside of getting fired if more severe, a rational worker will work harder to ensure that she doesn't get fired. Second, there are psychological reasons why a higher wage might induce effort since people tend to prefer working hard for people and organizations that acknowledge their worth and respond in kind.

Drawbacks of Efficiency Wage Theory

Efficiency wage theory will help in providing a united description of some of the labour market rate of wages and employment trend of companies. According to Hatfield, et al., (2013) moreover, according to the efficiency wage hypothesis, higher income taxation can help in reducing the advance tax pay inequality. The companies in the market can be benefitted by lowering the discrimination in pay to employees. This can also help in reducing taxation strategies used by employees to save salary. The theory application in a company will also need less labour regulation calls, as the company is paying already above the equilibrium level of the market. This can be beneficial for the company to save the talented employees before they are transferred to competitors (De Paula & Scheinkman, 2011). The method which can be helpful for a company to determine efficiency wages is collective bargaining through which employees’ engagement is done and higher pay rate is decided by mutual consent.

It is hard to locate some of the key defects in efficiency wage theory, as they affect the pay level of the company completely and that too sometimes without the consent of all stakeholders whose wages will be changes due to efficiency wage theory. The efficiency wage hypothesis also calls for complementing other theoretical concepts like demand and supply, wage rate and many more but most of the time the application of other concepts is not properly linked to the efficiency wage pay level. This inefficiency leads to discrimination and dissatisfaction amongst employees.

Moreover, the relation and connection between the collective bargaining, employee market, and efficiency wage are not properly explored to implement the correct benefit to employees. The one more disadvantage of efficiency wage concept is that the pay level in the open market sometimes does not reflect the real cost of production (Vergari, Tibuzzi & Basile, 2010). The production cost is sometimes altered to implement the efficiency wage theory creating discrimination or unequal wage for employees. This concept also calls for unwarranted difference in income leading to inequality in organization of same qualification employees getting entirely different pay.

If in Frost food & Beverage Pte ltd six employees are working jointly as a team to manufacture hamburgers. And on the off chance, the price of hamburgers sells @$1.00 for one piece. There present an X employee who is making  8 hamburgers, Y employee making  10, Z worker that’s adding 12, B worker that’s making  14, and their most productive worker, making 16 hamburgers and as a team, they are producing on an average 12 hamburgers every hour. The hamburger cafe executive observes his team and concludes that five workers are delivering $60 which is beneficial to the company. So some of the employees will be satisfied with this pay, but there is present dissatisfied employee B producing the highest number of units. According to Haefke, Sonntag & Van Rens, 2013) employee will leave and shift to another firm if he will be paid in competitor firm at the rate of $14 per hour and the employer of Frost food & Beverage Pte will be losing production of 16 hamburgers per day. Moreover, when that talented employee leaves the organization the average productivity of the company will also fall. It will be possible that company will be able to produce 11 hamburgers only at the place of 12 hamburgers, so the Frost food & Beverage Pte should try to keep the efficient and talented employee to maintain the productivity as well.

That is the reason Frost food & Beverage Pte ltd should intentionally pay a higher wage so as to pull in the more gainful specialists (Hesketh, Lu & Xing, 2011). At that point what the organization would do is put some exertion in screening the specialists endeavouring to get at their private data, making sense of who can deliver a great deal of cheeseburgers, and who can create a couple – on the grounds that at the high wage, company will be able to draw in a considerable measure of employees (Bhasin, 2010).). The Frost food & Beverage Pte should start to screen and select, with the goal that it can keep these higher specialists at the higher wage, and discover some method for recognizing the low-profitability employees and not contract them by any means. Be that as it may, the company must pay a high wage, a wage above market harmony, on the off chance that it needs to pull in the absolute best employees. That is the thought behind an effectiveness wage.

Another case is JPMorgan Chase & Co Inc which will raise the minimum wage for numerous employees in U.S. over three years, a decision which was taken due to equilibrium theory and political pressure of some states. It was taken to retain the highest efficient and talented employee in the organization.  The salary increase was in U.S from current pay of $10.15 to an equilibrium wage of ranging $12-$16, according to the efficiency and output provided by employees (Visser, 2013). The move was taken to turnover of the talented employee at speedy rate due to low pay level in the organization. So JP Morgan took a step to pay equilibrium pay to experienced and talented employees.   The equilibrium wage trend is going up and definitively in densely populated states and cities.  This is going mainly in areas where JP Morgan has a large number of employees. This equilibrium wage payment satisfies the need of talented and efficient employees. The reason behind high turnover of employees is pay only, which can be resolved by JP Morgan easily by compensating employees with a superior pay level than competitors.

This has shown that nominal income has been increasing by high numbers as compared to labour productivity change. In other words, wages or income paid to employees are increasing throughout the time but in several companies productivity is changing in positive direction by very low amount.

In spite of the fact that expanding employee efficiency by increasing wage rates has been in presence in some frame or another since the most recent century. It has been the conflict of that the equilibrium wage does not change in accordance with disequilibrium conditions in the work market, and that this is the best technique for achieving employee market equilibrium not through changes in real wage rate but through statist machinations planned to enhance goodwill in the market. The presence of efficiency wage theory also suggests that the labour market won't be stable at time and will need additional market powers in the economy.     

Conclusion:

The theory of efficiency wage define that worker productivity is having positive connection with the salary paid to employee. The equilibrium wage pay level not all times gives best results as observed from above report. The outcomes sometimes after applying the theory is reversed as employee become lazy and irresponsible towards his work, making organization to face opposite circumstances. In last the cases of Frost food & Beverage Pte and JP Morgan is explained showing how the model is implemented.

References:

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De Paula, A., & Scheinkman, J. A. (2011). The informal sector: An equilibrium model and some empirical evidence from Brazil. Review of Income and Wealth, 57(s1).

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