Question

7. Efficiency wages cannot prevail in the long run. Do you agree or not, why? Discuss.

Answer 1

Efficiency wage is the wage which is a bit more than the equilibrium wage rate. Firms believe that the extra wage will increase the productivity of the workers and thereby benefit them indirectly. Since paying more wage than the equilibrium one leads to the excess supply of labour and thus unemployment, by this process firms keep most skilled people with it.

Efficiency wages cant prevail in the long run and there are reasons for it -

First of all, if by paying more money the productivity of one firm increases then the other firms will copy the same idea and the efficiency wage will be lost in the long run.

There are trade unions in place and they will bargain for more employment as against some reduction in the wage rate. This will make the efficiency wage disappear in the long run.