Pay For Performance
Discuss about the Efficiency Wage Models Of The Labor Market.
The standard competitive world does not allow for any kind of wage differentials except for the variations in job characteristics. Efficiency wage hypothesis therefore explains why certain firms pay premium wages in order to avoid certain types of cost. The high unemployment rate in many economies made many economists believe that involuntary unemployment is one of the major issue in modern economies. Therefore, the efficiency wage theory in the recent years states the reason behind involuntary unemployment in the market.
According to the theory of macroeconomy, the amount of money that the workers receive is simply termed as wage which equals exactly to the average cost of labour. The basic principle of the Efficiency wage theory is that the workers productivity is related to the real wage and that the firms have complete market power to set the wage ( Healy 2016). Therefore, the firms must not reduce their wages in case of involuntary unemployment so that in order to maintain high productivity. The main factors that results to positive relationship between the wage levels and productivity of workers include adverse selection, shirking problem, morale effects and nutritional concerns. With more incentives the employees feels motivated and performs. Lastly, the backward bending labour supply states that efficiency wage does not always work efficiently and therefore it is required to regulate the policy implemented.
Pay for performance is a type of incentive plan which motivate the workers to increase productivity and performance. The workers willingness to work always increases when proper incentives are provided to them which also increases productivity and efficiency of the workers. Pay for performance will increase the outcomes of business when the incentive increases. This scheme indirectly reduces the turnover rate of the employees. The objectives of an organisation may not always motivate the employees to work more, therefore the incentives work as motivational factor for the employees to work more. Therefore, it is quite an effective tool to motivate the employees. pay for performance directly or indirectly ties pay with an individual’s performance while meeting specific objectives. In order to track and evaluate performance of the employees the managers usually design targets to be achieved.
Though implementing pay for performance has increased the productivity of workers, however there had been cases where implementing pay for performance did not work out. Failures may arise due to accidental breakdown of machinery or due to disruption of work.
Efficiency Wage Theory
Efficiency wage theory states that productivity of the firms increases and it can operate more efficiently when wages will be paid above the market clearing wage. The benefits of the firm also depends on the following theories:
The above theory states that when workers are paid above the equilibrium wage will put in more effort in work. As it is not possible to prevent shirking of employees or constantly monitor the employees, therefore there will be a tendency of the employees to take advantage. However, when workers are paid efficiency wages there is a less tendency to shirk. This happens because when firms pay well to the employees it becomes difficult for them to find a similar job of equal pay.
This theory suggest that paying efficiency wages will reduce employee turnover. when higher wages are paid, the turnover of employee decreases. Training and hiring new workers will increase the cost of production and will take up valuable time.
This theory suggests that efficiency wages usually attract highly skilled and good quality workers. When efficiency wage is paid by the firms good quality workers does not leave. Self selection takes place when there is a positive correlation the ability of the worker to do work and the reservation wages.
This theory suggests that when efficiency wage is paid the health of the employee increases and therefore the productivity increases. The reason is that when higher wages are paid employees can take c are of themselves which increases their quality of life.
Therefore according to the Efficiency Wage Theory, when the pay wages are above equilibrium level firms become more productive and efficient. Therefore, workers will put more effort to work when they are paid well.
Shirking: Employees do not leave their job when they are paid higher wages. The workers does not leave when wages increases because the cost of leaving the job becomes higher. One of the main problem the workers face in the workplace is shirking (Schmitt .2013). According to Shaprio Stigletz model, the level at which the workers are paid where they do not shirk. The wages therefore will not fall below equilibrium level.
The backward bending supply curve is a graphical representation which shows that when wages increases at a higher wage beyond a certain level, workers tries to substitute leisure for worktime and this the reason how increased wages can decrease labour supply and therefore less labour time s offered to sale
Backward Bending Labour Supply Curve
The diagram above shows the labour supply curve changes and affects the number of hours .
When real wages increases from w1 to w2, the workers are willing to work more and therefore L moves from L1 to L2 (Lin 2013). Similarly, when wages increases from W2 to W3, L2 will fall to L3 as income effect will exceed the substitution effect.
According to a research made on the Safelite Glass Corporation , where workers were paid piece rate pay instead of hourly wages in order to motivate them and increase their productivity. The glass installer company of Ohio started paying according to the number of glasses installed instead of paying at an hourly rate. The employee performance of around 19 months period is been taken. Collective data of the incentive scheme is been collected after a period o 19 months( Lazear 2000). Workers were also provided an increase of ten percent increase in wages as a bonus. The turnover rate of workers of high productivity tends to decrease as the result of the incentive structure. This will also attract good quality workers. The ambitious workers also tends to work more due to the piece rate pay scheme.
The pay for performance model, backward bending supply curve and efficiency wages though works well in the market however it needs to support empirical evidences. The unemployment effect of Australian economy though does not support the efficiency wage theory. There are many factors that may affect the unemployment rate of the Australian economy like those of any kind of external phenomena and dynamics of business cycle.
Relative wages play a very vital role in case of wage bargaining for the employees. Argument with respect to wage differential states that when workers are paid higher wages, there will be increase in his productivity and all the turnover rate will fall as the worker will not look for any other job ( Ederer and Manso 2013). On the other hand Yellen and Levine also argued that the individual effort of the worker reduces if wage is regarded as unfair. Differences in wages results due to labour market functioning. According to a research conducted in TESCO it has been found out that the differences in wages have impacted the firms business and also it turnover rate. The wage differential in TESCO mainly takes place due to its different location, gender gaps and unionization effects. The reason why the non union firms tends to offer wages above market clearing rate can be explained by efficiency wage hypothesis. According to Stigletz, firms will never lower their wages even though there is excess supply of labour. increase in wage will also attract a lot of high quality workers which will reduce efficiency and decrease shirking. The bonus schemes were started where both workers who are salaried and hourly paid are rewarded.
Conclusion
While concluding it can be said that pay for performance follows the efficiency wage theory. The efficiency wage theory therefore supports that if the workers are paid more both the productivity and efficiency will increase. This will also reduce the labour turnover rate and the level of shirking will also go down. There are both positive and negative aspects of pay for performance which will also generate different types of results in the industry. Along with the wage hike, the motivation factor of the employee also plays an important role in the workplace. However, the presence of backward bending labour supply curve states that the efficiency wage model should be implemented properly.
Reference List
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