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UK's Real Living Wage Rises to £12 per hour

Graham Watson

24th October 2023

The Real Living Wage - a voluntary commitment by firms - is rising to £12 per hour today (£!3.15 in London) , a rise of 10%.So far this covers 14,000 employers and 460,000 workers, so why do firms want to pay more than the National Minimum Wage? Perhaps efficiency wage theory has something to say?

It seems that participants have seen increased productivity, happier workers and presumably lower levels of labour turnover, with employees remaining with firms for longer and more applicants for any jobs that arise. And given that executive pay has recently increased faster than that of the ordinary worker, the latter feel that their managers hold them in higher regard than those workers whose firms only pay the NMW.

Efficiency wage theory is an economic concept that suggests that paying workers higher wages than the market equilibrium or the minimum wage can lead to increased productivity and reduced turnover. This theory is based on the idea that paying higher wages can have several positive effects on a company's performance and overall economic efficiency.

Efficiency wage theory is founded on several key assumptions and mechanisms:

  1. Worker Effort: Higher wages can motivate employees to work harder and be more productive. When workers are paid more than they could earn elsewhere, they may feel a sense of obligation or loyalty to their employer, leading them to put in greater effort.
  2. Quality of Workers: Higher wages can attract a higher quality of job applicants. When wages are above the market rate, more skilled and motivated individuals may apply for positions, leading to a more productive and skilled workforce.
  3. Reduced Turnover: Higher wages can reduce employee turnover. When workers are paid well, they are less likely to leave their jobs in search of higher-paying opportunities, reducing recruitment and training costs for employers.
  4. Lower Shirking and Monitoring Costs: Employees receiving higher wages may be less likely to engage in shirking or slacking off on the job. This can reduce the need for costly monitoring and supervision by employers.
  5. Enhanced Firm Reputation: Paying higher wages can improve a company's reputation as a desirable employer. This can help attract and retain talented workers and can positively impact a firm's relationships with customers, suppliers, and other stakeholders.
  6. Improved Employee Health and Well-being: Higher wages can lead to better living standards and less financial stress for workers, which can result in better physical and mental health. Healthy and content workers are more likely to be productive.

It's important to note that efficiency wage theory has its limitations and may not apply to all situations or industries. Critics argue that paying higher wages can be costly for employers and may not always lead to the expected productivity gains. Additionally, the theory assumes that employers have perfect information about their employees, which may not be the case in reality.

Efficiency wage theory is just one of many theories in labor economics, and its applicability can vary depending on factors such as the industry, labor market conditions, and the specific circumstances of a company.

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to tutor2u, reads voraciously and is interested in all aspects of Teaching and Learning.

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