Efficiency wage theory is the theory that the productivity of a worker increases with the wages he is paid. It was first applied in the late 1950s to developing economies; in this context it became clear that higher wages enable poor workers to improve their diets and thus to become more productive. Recently, however, the argument has been applied in developed economies to explain involuntary unemployment. Higher wages raise morale and company loyalty, attract better quality workers, and result in less shirking. Thus, even in a recession, when some workers are being made redundant, firms will be unwilling to reduce wages levels to reflect the balance of supply and demand. Research Efficiency Wage Theory
In economics, involuntary unemployment is unemployment in which workers who would be willing to work for lower wages than those in employment are still unable to find work. John Keynes argued that recessions are characterised by
involuntary unemployment because firms may be unwilling or unable to cut the wages of workers they employ. Although neo-classical economists have found difficulty accepting this concept in recent years, a number of theories (including the implicit contract theory and the efficiency wage theory) have been suggested to explain it. The emergence of these theories reflects the need to explain the high and persistent levels of unemployment that began in the 1980s. Research Involuntary Unemployment
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Abbreviations
Research Efficiency Wage Theory
