[This is part of the series: The Complete Guide To Economics 101.]
What are efficiency wages?
Efficiency Wages are wages that are above market, which are paid to increase the productivity of a worker.
The theory goes like this:
Say a business knows a worker is worth $70,000 per year to them.
But the worker will accept the job for anything over $35,000 per year.
Businesses that pay the worker closer to $35,000 per year (the market rate) might have a worker that is less motivated, less loyal, less productive, and more willing to shirk responsibilities.
Businesses that pay the worker closer to $70,000 per year might have a worker that is more motivated, more loyal, more productive, and less willing to shirk responsibilities.