Literature Review On Efficiency Wage Theories

Organisation: Fair Work Commission Australia

Discuss about the Human Resource Economics for Fair Work Commission Training.

The aim of the paper is to reflect the key findings of economic literature which include the effectiveness of pay for performance. The Fair work commission Australia has hired me as a consultant to analyse the issues related to pay and performance. The report includes the literature review on Efficiency wage theories and application on a firm.

Organisation: – Fair Work Commission Australia is independent government organisation which works with the motive to regulate Australia’s workplace relations system. Moreover, it operates the business under the Fair Work Act 2009. The major function of this independent body includes the carrying out a range of functions that are related to the safety net of minimum wages and employment condition which mainly focus on enterprise bargaining, industrial action, dispute resolution, employment termination and other matters of a workplace (Australia Government 2018). Along with this, the role of Fair Work Commission includes setting minimum wages, bringing and changing the modern awards, approving the enterprise agreements and acting as independent umpire in disputes which consist of unfair dismissal claims (Fair Work Commission 2018).

The commission allows the individuals to come to a commission of they been through unfairly dismissed, discriminated against the workers, victimised people who are treated unfairly under the provision of the Fair Work Act of Australia. The fair work act is followed by the entire organisation operating their policies effectively (Fair Work Ombudsman 2018). This will help them in making the employees believe that they are effectively treated by the company.

This section of the report draws the review of literature that is written by the different authors on the concepts of Efficiency wage theory and its related concepts.

According to Keynes 2016, 45 in the mainstream of the theories of economies labour supply refers to as the total number of hours the employee wish to work at given real wage rate. The author shares the review that labour supply curve of occupation and industry will be upward sloping. This opinion was shared after considering the research that wage rise attracts the workers towards the industry with the rise in the incentive of higher rewards. Considering the viewpoint of another author Batt, and Colvin 2011, 701 the rise in the wage or salary in an occupation helps in bringing the expansion on the supply of labour that mainly depends on the elasticity of labour supply. In addition, the author reflected that there are numerous factors that can affect the labour supply in the current market. Moreover, this is the fact that labour supply depends on the industry to industry.

Efficiency Wage Theories: Literature Review on Key Findings

According to the Golden and Figart 2013, 150 in economics backwards bending supply curve of labour is a graphical representation that reflects the situation in which as real or inflation corrected and the wages rise beyond the certain level. Moreover, the employees will substitute leisure for paid work time and accordingly the higher wages lead to decrease in labour supply. Agreeing to the same, other Keeley 2013, 175 said that there are two effects that are linked to the determination of supply of labour. These effects include substitute effect and income effect. In substitute effect, the rise in the wages will make the employees shift to other industry where they can get the high incentive. This might lead to the issues or challenges for those companies that fall under the industry whose wages are less. On the other hand, there is income effect in which rise in the income will make the employee work for less number of hours.

This is the graphical representation of the Backward Bending supply curve of labour which clearly shows the indirect relationship between the wage rate and hours worked by the worker.

According to Taylor and Taylor 2011, 69 the efficiency wage theory in terms of economics can be explained that rise in the wages can lead to a rise in the productivity of employees or workers. The theory states that the workers who are paid more than the level of equilibrium level will try to put more efforts than workers who are paid the equilibrium wage or below. The efficiency wage literature maintains that the company should offer their workers a wage rate that is above the clearing rate of market.

Considering the point of view of Weiss 2014, 55 paying employees a wage premium leads to the rise in the workplace cohesiveness, productivity, employee loyalty and responsibility and a decrease in shrinking. In addition, this can be said that efficiency wage model is also known as shirking model. the author state that the model is based on assumptions that include that firms require effort from their personnel that supports the company to produce goods and services, the efforts of personnel is imperfectly observable and along with this, it is assumed that employees who found to offer less than contractual level of effort would leave their jobs. In addition, the personnel mainly get the utility from leisure and have an incentive to shrink on a job. The theory was explained with the help of a diagram. The below-given diagram reflects that rise in the wages contributes to increase the MRP (labour productivity).

Conclusion

The decrease in the wages might reduce the efficiency that is put in by the workers in the work that is done by them within the organisation. There are different reasons behind the efficiency wage theory which include the fear of losing jobs, loyalty, labour market, lower cost of supervision, attracting higher quality labour and nutritional theories.

According to Zouari, 2010, shrinking model is considered as one of the most important models which are a submodel of efficiency wage model. The model includes the different factors that can lead to the impact on the ability of the firm to extract the efforts from the workers. Most of the firms follow the efficiency wage theory in which this theory is similar. Therefore the firms should pay the higher wages as this allows the company to give the quality workers when monitoring is costly or difficult. Thus, this reflects that expectation for identifying the shrinking is low. Firms should always ensure that they are able to maintain good terms with the employees so that they can’t leave the organization.

According to the Ehrenberg and Smith 2016, this model includes several other submodels like labour turnover model and this model reflect that they are workers who are likely to be more reluctant towards quitting the jobs for a higher wage paid. This model is quite similar to that of the shrinking model in terms of the formal structure. Moreover, the companies try to attempts so that they can pay high relative wages to reduce the cost that is associated with the turnover that can lead to equilibrium with wages in the excess of marketing clearing. The author reflects that the major failure of this model is a market failure because the wage is playing a dual role in the market. Along with this, this has been analysed that the model predicts that wages will high where the hiring and training cost is formidable and this can be said that the premiums need to be associated with the lower turnover rates.

Considering the viewpoint of another author Yellen 2013, 203 model offers an explanation for the wage distributions within the same industry for the similar sort of workers. The workers who perform the same sort or type of functions involve the high wage-low turnover and low wage-high turnover strategies. Along with this, another model is adverse selection model in which the imperfect information by firms related to the abilities of the employees offers a selection rationale for the efficiency wage payments. This model helps the workers within the form to learn the ability of the workers. Author reflected that the performance bonds are one of the ways through which the adverse selection problems can be resolved. If in case the company measure the performance on the job, pay-for-performance scheme reduces the problem.  

Another submodel of the effective way theory is a Sociological model in which the efforts of workers depended on to believe that they are treated by the employer fairly or not. The productivity of the worker is linked to the morale and feeling of loyalty towards the company. According to the Katz 1986, 20 this can be said that the positive number of sociologically model is based on the efficiency wage implications. This is the only reason due to which most of the firms pay attention towards the perceived fairness and consistency of their internal wage structures.

Union threat model is a submodel of EWT theory which shows that the companies generally face the important diseconomies of scale while offering training and hiring the workers. The company in the current era generally spend the amount on job search and relocation then they have to bring the rise in age offer or reduce the quality for accepted applicants to replace a large number of workers proactively (Guerrazzi and Sodini 2018, 65). The model is basically related to the collective action which includes the cost of turnover to rise rapidly when the number of workers is required to get replaced in the set time period. Along with this, collective action can offer the workers with more bargaining power.

According to the Daley 2012, 124 pay performances are formal compensation systems that are linked with the organizational or individual performance. These systems are most effective when they are based on the objective which measures the quality or quantity of performance. In simple words, the payments are done to the employees for their effective performance within the organisation because this performance helps the organisation in achieving the success of the company. The efficiency of the payment model is totally depended on the three things which include equity, efficiency and compliance.

The analysis of the literature review reflects the EWT support the organisation to motivate the employees within the organisation which boost the performance. The company who is operating the business in Singapore is Jetstar Company. The company is highly recognized in the market as it provides the airline services to its customers. The company understand that the fair work commission or act is important for the effective workplace environment. This is the obligation of the Jetstar Company to follow the laws and regulations.

Efficiency wage theory reflects that the rise in the wages results in the increase in the productivity of the company. Though, this theory might also lead to some of the challenges for the Jetstar Company. The company making the payment to the employees according to their work due to which the wages or payment differ from employees to employees that are present within the organisation. Along with this, the payment for the performance is also followed by the company as they know the value of their employees. The company faced the incident due to which the employees of the company suffered. The implementation of the efficiency wage theory will contribute to improve the wage slab of the employees which is essential to maintain the performance and for retaining the employees.

The company also faced the issues as they were fined for the breached of workplace laws. Jetstar Company deducted the salary of their employees as they made the 6 cadet pilots responsible for the training cost. The company agreed that they breached the fair work act and due to which they got penalised. In the Singapore market, Fair Work Ombudsman’s proceeded with the separate legal proceedings against Jetstar Airways Pty Ltd. the company was liable for the amount of $45,000 in Sydney as well as in Singapore market. This shows that they deduced the wages of employees which was legal because the amount of training was not supposed to be deducted from the salary of employees (Fair Work Ombudsman 2014). The issues which are faced by the company after proper implementation of the efficiency wage theory within the organisation. This theory helps the company in ensuring that the employees are motivated and providing effective performance within the organisation. Considering the theory, Jetstar Company can bring the rise in the wages which makes the employees work with the efficiency because this rise in wages will help them in fulfilling the personal objectives.

Considering the applicability of the concept of pay performance, Jetstar Company provides the reward and recognition to the employees when they perform well. The airline enjoys the benefits and perks which include the insurance benefits, vacation policy, retirement benefits and other monetary benefits (Jetstar 2018). Along with the company believes that energy and commitment of employees is the key to success which is possible with the implementation of the rewards and recognition system within the organisation. This is the way through which the employees feel proud that they are contributing to the success. These reward and recognition make them motivated towards the work which ultimately gives rise to their productivity (Dunlop and Segrave. 2016). The overall analysis reflects that the aim of the company is that better pay is essential to attract and retain labour.

In the end, it can be concluded that the efficiency wage theory plays a vital role within the organisation. Fair Work Commission Australia performs the operations in which they ensure that they are performing their roles and responsibilities for the effective fair work wage. The major concepts related to the wage act are discussed with the support of the research done by the numerous authors. The concepts on which research is done include labour supply, backward bending supply curve, efficiency wage theory and the pay-performance. The report mainly focuses on the concept of the efficiency wage theory and its related models. In the end, there is a review of the pay-performance concept which through light on the benefits that are essential to pay to employees of the company when they ensure that they are doing quality and quantity activities within the organisation that helps in improving the performance. The report also reflects the applicability of the concept on the real world company that operates the business in Singapore market. Jetstar Company operates the business and ensures that they follow the theory which will help them in resolving the issues faced by the company. Along with the company offer the incentives and other rewards which help the company in improving the employee’s performance. This concept is known as the pay-performance concepts which contribute to improve the performance of employees present within the organisation.

References

Australia Government. 2018. Fair Work Commission. https://www.australia.gov.au/directories/australia/fwc

Batt, Rosemary, and Alexander JS Colvin. 2011. “An employment systems approach to turnover: Human resources practices, quits, dismissals, and performance.” Academy of management Journal 54(4): 695-717.

Daley, Dennis M. 2012. “Strategic human resources management.” Public Personnel Management. 120-125.

Dunlop, John, and Marie Segrave. 2016. The theory of wage determination. New York City: Springer.

Ehrenberg, Ronald G., and Robert S. Smith. 2016. Modern labour economics: Theory and public policy. New York: Routledge.

Ehrenberg, Ronald G., and Robert S. Smith. 2016. Modern labor economics: Theory and public policy. New York: Routledge.

Fair Work Commission. 2018. What is the Fair Work Commission?. https://www.fwc.gov.au/disputes-at-work/how-the-commission-works/video-tour-of-the-commission/what-is-the-fair-work-commission

Fair Work Ombudsman. 2014. Jetstar fined over breaches of workplace laws. https://www.fairwork.gov.au/about-us/news-and-media-releases/2014-media-releases/february-2014/jetstar-cadets-penalty

Fair Work Ombudsman. 2018. The Fair Work Commission and us – what’s the difference? https://www.fairwork.gov.au/about-us/our-role/the-fair-work-commission-and-us-whats-the-difference

Golden, Lonnie, and Deborah M. Figart. 2013. Working Time: International trends, theory and policy perspectives. New York: Routledge.

Guerrazzi, Marco, and Mauro Sodini. 2018. “Efficiency-wage competition and nonlinear dynamics.” Communications in Nonlinear Science and Numerical Simulation 58: 62-77.

Jetstar. 2018. Like at Jetstar- Recognition and Benefits. https://www.jetstar.com/au/en/careerportal/home/life-at-jetstar/recognition-and-benefits

Katz, Lawrence F. 1986. “Efficiency wage theories: A partial evaluation.” NBER macroeconomics annual 1: 235-276.

Keeley, Michael C. 2013. Labor supply and public policy: A critical review. London: Elsevier.

Keynes, John Maynard. 2016. The general theory of employment, interest and money. India: Atlantic Publishers & Dist.

Taylor, Jeannette, and Ranald Taylor. 2011. “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(1): 67-86.

Weiss, Andrew. 2014. Efficiency wages: Models of unemployment, layoffs, and wage dispersion. New Jersey: Princeton University Press.

Yellen, Janet, L. 2013. “Efficiency Wage Models of Unemployment.” Journal of American Economic Association 74(2): 200-205

Zouari, Abderrazak. 2010. “Efficient structure versus market power: theories and empirical evidence.” International journal of Economics and Finance 2(4): 151.