LN16 : HR Economics : Turnover and Sociological Theories

Part 01

The theory section for instance, the analysis found in Backward Bending Labour Supply Curve and the analysis found in the efficiency wages theory.

Part 02

Research the literature for empirical evidences that either support or challenges the theories found in part 01. For instance does the nothing of paying efficiency wage supports what is happening in the real world

Answer: 

The aim of the paper is to find the relationship between the higher wages and higher efficiency. The sector which is chosen in the paper is the agricultural sector. The efficiency wage theory states that firms will operate in a more efficient way and also in a more effective way when wages will be paid above the level of equilibrium. Efficiency wages are applied in order to avoid shirking, for minimization of turnover and sociological theories. Efficiency wage also helps in increasing the effort of the employees.

The theory of backward bending supply curve states that in the period of inflation when the wages rises beyond a certain level then in that case the people will be substituting leisure for the paid work hours ("Efficiency Wage Model Of Unemployment". 2018). Therefore, it can be stated that when high amount of wages is been provided it will lead to decrease in the supply of labour. In the real world back ward bending of supply curve are affected mainly by the substitution effect and the income effect. The efficiency wage also states that when the employees are paid lower wages the highly efficient and the productive workers will be then looking for jobs elsewhere. when the workers are paid more then it acts as an incentive of not to look elsewhere for the work.

Shirking model: the shirking model postulates various factors which affects the ability of firm to extract effort from the employees and also yields some predictions which concerns nature of the unemployment and wage differentials. In case when worker does not want to work he will still do the work in order to avoid being unemployed.

Literature review

Cyclical fluctuations related to efficiency wages: the model of the efficiency wage states that there is a presence of cyclical fluctuations which also generates demand shocks. The theories related to efficiency wage states that the firms can find it profitable for paying wages which will be above the level of market clearing as wage premiums will also help in reduction of turnover of the employees (Taylor, Jeannette and Ranald Taylor). The evidence on the wage differences in the industry states that there is presence of huge differences in wages which is quite difficult to explain related to the quality of the labour.

Backward bending supply curve: the backward bending supply curve is both theoretically significant and interesting and also contains important policy implications. In this part it can be said that the income effect will always dominate the substitution effect. Although a large number of studies shows that the hourly supply curve which does not have any income effect will be sloping downwards.

The relationship between backward bending supply curve and efficiency wages: there is a presence of a close relationship bet ween the backward bending supply curve and the efficiency wage. As according to the theory of efficiency wage it is known that when employees are aid higher than the market clearing level, they will perform better, however, when the amount of wages is too high it will lead to decrease in the supply of labour.

Reasons behind providing efficiency wage to workers: there are several reasons for providing efficiency wages to the workers which can be to avoid shirking, minimizing turnover rate, for encouraging high morale and also for nutritional theories (Taylor, Jeannette and Ranald Taylor 2011).The workers need to be paid in such a way so that they do not shirk which will in turn also prevent wages from falling to the market clearing levels.  Efficiency wage are need to be paid to the workers in order to avoid the labour turnover rate.

Findings

The typical salary of the sales representative of McDonalds is around $46,000 and the salary for the same post in KFC is A$20 which is paid on hourly basis. Now the minimum wage of Australia is known to be around $17.70 per hour which states that as the workers are paid above the minimum wage level, they tend to perform well in these firms. However, had they been been paid a huge amount for the work, they would have substituted work with leisure which would in fact lead to backward bending labour supply curve. In order to motivate the workers for performing well, wages can be slightly increased above the efficiency level, and they could also be provided with huge incentives which will again motivate them to work more .The incentives should be on the basis of pay for performance.

In order to conclude it can be said that workers in any particular firm should always be paid wages which will be above the efficiency wage in the industry in order to avoid shirking and reduce the labour turnover rate. However, it should also be kept in mind that in case when the wages of any firm increase beyond a certain level, the workers will then substitute leisure for worktime which lead to decrease in labour supply forming the backward bending labour supply curve.

Reference:

"Efficiency Wage Model Of Unemployment". 2018. American Association. https://www.jstor.org/stable/1816355

"Higher Wages, Fewer Jobs? It's Not That Simple". 2018. ABC News. https://www.abc.net.au/news/2015-01-29/koukoulas-higher-wages,-fewer-jobs-its-not-that-simple/6052010.

"Nber Working Paper Series Efficiency Wage Theories: A Partial Evaluation". 2018. Nber.Org. https://www.nber.org/papers/w1906.pdf.

Taylor, Jeannette, and Ranald Taylor. "Working hard for more money or working hard to make a difference? Efficiency wages, public service motivation, and effort." Review of Public Personnel Administration 31, no. 1 (2011): 67-86.