Essay on Efficiency Wage Theory

Date:  2021-06-17 10:11:49
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For any organization to be successful, employees need to be paid according to their input. Such actions would motivate them to even perfume better for that organisation. Fair Work Commission Australia is one of the organisations that have tried to apply the efficiency wage theory in their operation. The institution was formed under the Australian industrial relation created by the Fair work act in 2009. Some of the functions carried out by FWC include setting and varying minimum wage fixation, industrial awards, handling claims of unfair dismissal, and the approval of enterprise agreement. However, the organisation is widely recognised due to their efforts of fixing minimum wage rate for the employee. It was evident that some employees were not compensated as per their efforts in a given task. As such, the organisation was established to ensure that all employees are given a certain minimum wage rate. Also, the organisations aim as ensuring that employer is treating their staff equally without discriminating based on their gender, colour or religion. Dispute resolution was another function of the institution as it tried to resolve various issues that related to different employees. In the event those employees are behaving in inappropriate manner, the organisation is also permitted to terminate their contract. In the recent decades, the organisation has been given more roles such as regulating some of the Trade unions formed under the Labor Act. As such, it ensures that all the unions registered are legal and formed for the right purpose. The fair act work is an attempt to create a better national system aim at regulating industrial relations in Australia.

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Efficiency wage theory explains that a firm may permanently hold a real wage greater than the equilibrium wage. The theory focuses specifically on the relationship between pay and performance. It was believed that some employee tends to perform better when there are given a certain minim wage which is higher than that of the market. As such, they would be motivated to increase their performance (Hicks, 2011). In the modern business environment, many organisations tend to focus on employees as one of their best resources. In that light, they tend to pay their employee a certain wage rate which is much higher compared to others in the same environment. The management of such organisation tends to believe that employees are motived by their pay rates.

Some of the reasons that make managers pay efficiency wages include the following. First, it helps to attract other potential employees from a different organisation. Most managers are aware of the fact that employee is the major determinant of the success of an organisation. If the employees are not performing as expected, it is likely that the organisation would not achieve its goals and objectives (Dewatripont, 2013). By paying a certain wage rate for the employees, it will attract other potential employees from a different organisation. In that light, the intention of every employee is to enhance growth both financially and physically. The issue of outsourcing is a common concept in the modern business environment. This refers to the action in which some employees are offered better rewards for them to work for another better organisation.

Reducing turnover is another reason that managers enforce efficiency wage in their organisation. It is evident that employees are motivated by the types of incentives offered to them. As such, they have the assumption that they would not be able to work effectively for an organisation and yet there are not benefiting in any way (Bernardo, 2010). To ensure that such issues are minimised, the manager must pay them much higher than the wage rate in the market.

Shirking is also another reason that leads to managers enforcing efficiency wage. Shirking relates to providing less quality work that is required. If employees are motivated by their pay, then the organisation must be able to in case their wage rate for them to perform as expected. In most cases, the organisation is likely to suffer the most if the employees provide less quality work. Due to the increase completion in the market, companies must be able to meet the expectation of their customers through providing quality products (Lindbeck, 2010).

Based on the reports, Fair work commission in Austria should embark on a mission of trying to and resolve the cases in which some organisation are paying their employee's much higher wage rate compared to others. There should be standards pay rate that all the employees should receive. However, according to the critics, such actions would lead to low demand and supply of employees which would affect the equilibrium of the market. In that light, they explain that manager should be allowed to pay their employees a much higher wage rate if they want them to perform as per the goals and objectives o\f the organisation. Most organisations have tried to ensure that their employees can work extra workers as a way of increasing the production rate. It is the responsibility of Fair Work Commission to ensure that such employees are given more payments due to their over time. According to the Australia report, employees need to work for 8 hours.

The pay-performance structure was a system that was introduced in the country to gauge how to pay people based on their position or role in the organisation. It is evident that some employees are paid much higher compared to others, yet they are perming similar jobs. As such, the organisation needs to analyses and strategies on how they would establish the pay-performance structure for that organisation. In most cases, employees tend to feel demotivated if some of their fellow colloquies are being paid more than them. In most cases, managers tend to pay some employees more than others due to certain factors such as experience, and the terms of their contract.

Experienced employees are usually in high demand due to their ability to use that experience to transform a certain organisation. In that light, they need to be paid much more. Also, in some aspect, the employer might outsource an employer and make an agreement to pay him/her a certain amount of wage. The wage of that employee might be slightly higher than others in the same organisation. However, it is advisable for employees to keep such matters and confidential since it may lead demotivate others employees once they found out.

The pay-performance structure is also based on the assumption the most performing employees are given a pay rise. If the performance were poor, the associated rise would be minimal. In a way, such actions are made to motive employees to increase their production level. To ensure that the system, work effectively, the management should set a given standards for each employee or a team. As such, once they can attain those set standards, they would be given a pay rise (Rich, 2011). The system should be fair and transparent for it to be effective in an organisation. In some organisation, the management tends to set a common ground for all the employees by setting the same standards. Such system mostly applies to companies that are depending on the commission to pay their employees. Based on that, the employees must be able to sell some products for them to be given a certain amount (Spitz, 2009). However, the Fair Work Commission has tried to discourage such system since some employees may put more efforts by trying to sell that product but yet they are not lucky. In that light, the Commission advises other companies to set a certain amount of pay to be given to such employees.

Backward-bending supply curve of labour tends to show a situation in which when people are offered a pat rise, they are likely to substitute their free times and spend in on working. Based on that information, the higher wage rates tend to lead to a decrease in the labour supply as more people would be willing to spend less time on leisure activities that do not pay. The curve indicates that people are very willingly to work if they are compensated for the amount of effort they spend on those jobs. As such, they would avoid any leisure activities that are not as productive (Nemser, 2013). In most cases, the organisation tend to benefit when their employees tend to spend less time on their leisure activities are the rest of their time being productive. This is another reason as to why some of the organisation prefers increasing the pay wage for their employees than that in the market.

The Fair Work Commission should try to enforce and encourage other organisation to try and offer better incentives to their employee. The Commission was established to regulate the minimum wage rate that employees need to be paid. However, employers should be allowed to pay their employees any given amount of rising they want to incite. According to the reports, employees are motives more when their efforts are appreciated by the organisation. If a certain organisation is offering a better pay in the market, it is likely to encourage others to also increase the pay of their employees. As such, it would lead to increasing the minimum wage in which the employees would benefit.

The Fair Work Commission should also enforce the pay-performance structure in the Australian organisations. Such actions would lead to increase productivity which would also be reflected in the quality of the products (Pissarides, 2010). If the employees can concentrate on their jobs and deliver their best, the country will experience better and quality products which would suit their interest.

Based on the efficiency wage theory, organisations need to consider paying their employee wage that is above the clearing rate. Such actions enhance benefits to both the organisation and the employee. Through increasing their wage rate, the employee would be motivated to increase their performance. As such, the production level of the organisation is likely to increase. It is advisable that employers should ensure that they pay the same price rate for the employees in a given organisation. In most cases, when one employer is given a pay rise while others are left out, it would demotivate the rest.

In conclusion, the Fair Work Commission should enforce measures ascribed by the efficiency wage theory for the growth of the economy. If the organisation can increase their pay wage, the economy of the employees is also likely to benefit. Also, the pay-performance structure should be implanted by the Fair Work Commission as a way of fighting for equal pay rights for the employees in Australia. Managers need to understand the important of enhancing efficiency theory on their organisation. As such, the institutions must be able to educate people through advertisement and promotions.


Bernardo, R. M. (2010). The theory of moral incentives in Cuba. University: University of Alabama Press.

Dewatripont, M., Hansen, L. P., Turnovsky, S. J., & Econometric Society. (2013). Advances in economics and econometrics: Theory and applications : eighth World Congress. Cambridge, U.K: Cambridge University Press.

Hicks, J. R. (2011). The theory of wages. Gloucester, Mass: P. Smith.

Lindbeck, A., & Snower, D. J. (2010). The insider-outsider theory of employment and unemployment. Cambridge, Mass: MIT Press.

Nemser, T. J. (2012). Monitoring cost induced wage differentials: A test of the efficiency wage theory.

Rich, J., Teicher, J., & Monash University. (2011). Testing efficiency wage theory: The views of actual market participants. Caulfield East, Vic: Dept. of Management, Monash University.

Spitz, J. (2009). An empirical test of efficiency wage theory. Stanford, Calif.: Stanford Graduate School of Business.

Pissarides, C. A. (2000). Equilibrium unemployment theory. Cambridge, Mass: MIT Press.

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