Efficiency Wage Theory

Efficiency Wage Theory suggests that paying employees higher-than-minimum wages can lead to better performance and productivity. When workers earn a higher wage, they tend to be more motivated, healthier, and less likely to leave, reducing turnover and training costs. This increased effort and stability can outweigh the additional wage expenses, ultimately benefiting the employer. The theory challenges the idea that wages are solely determined by market forces, proposing that paying above-market wages can be a strategic move to enhance overall efficiency and competitiveness.