One issue facing an employer is that they have to make their employees work. There are various ways to try to make this happen. One of them is to actually give workers a stake in keeping their jobs. One of the theories looking more closely at this is termed “efficiency wage theory”. Proponents of this theory argue that higher wages may actually be more profitable than lower ones. Let’s analyse this further…
a.Explain (in your own words) the concept of unit labour costs. In the process, explain how it may be affected by the wage level, the efficiency of work, and the intensity of effort.
b.Explain (in your own words) the concept of the cost of job loss. What are some of the elements that factor in this cost? In particular, how does the level of the fallback wage influence the cost of job loss?
c.Explain how an increase in the cost of job loss may lead to an increase in the intensity with which workers work. What role does the wage rate play in this process?
d.Are there other ways in which the wage level may affect work intensity? If so, list at least two.
e.Combining your four answers above, explain how an employer must balance out the costs and benefits of increasing the worker’s wage rate. In particular, according to the efficiency wage theory thus outlined, how would an employer determine the proper wage level to offer their employees?