Poodles are special Wages Marginal Revenue Products and Efficiency Wages Does efficiency cause wages or do wages cause efficiency The Big Ideas In the orthodox model productivity determines wages because employers hire whenever MRPL Wage In the efficiency wage approach wages determine productivity High Road like Ford in building the Model T pay higher wages to get workers to be attentive diligent and to work hard We could encourage companies to act like this by mandating higher wages If there are both high road and low road companies there will be a queue for jobs and equilibrium unemployment The big problem getting work out of your workers Capitalists hire workers for a certain time They profit if the work produced in this time exceeds the wage paid This is call surplus value This was his idea but any business owner should understand Management is about getting people to work hard Other issues are technical Engineering coordinating production and choosing right tools and technology Sales Coordinating cash flow You win by raising Output above the wage Output Hour Output Minute Worked Minute Worked Hour First is productivity you need good engineers Second is labor intensity you need to motivate your workers Business School is not engineering school because it is about motivation Henry Ford and the 5 day Henry Ford and the Model T Model T built on a moving assembly line Model T could be made at a fraction the cost of other cars If workers worked hard But there were problems about 14 000 of them Workers hated their jobs at Ford Over 10 of workers were absent on any day There were so many quits that Ford hired 52 000 workers for 14 000 places Actually there were 52 000 problems On January 5 1914 Ford doubled wages establishing the 5 day Within 24 hours 10 000 lined up looking for work Absenteeism plummeted Workers stopped quitting And they stopped complaining Higher wages allowed Ford to maintain his assembly line His company was more productive because it paid higher wages His name entered the language Ford challenged the orthodox model of the labor market In the orthodox model wages are at the intersection of labor supply and demand the MU of time in other activities and the Marginal Revenue Product of Labor We discussed this a few weeks ago In the orthodox model there is no place for managerial discretion about wages Wages depend on 1 Technology which influences the MPL 2 Factor endowments the supply of other inputs like capital and resources which influences the MPL and cost of output 3 Preferences which influence the supply of labor and the price of final products Labor supply and demand orthodox view Demand curve is the MRP curve MRP P MPL Supply curve reflects the value of time doing other things leisure or home production Orthodox Model Productivity is exogenous Fordist Model Treatment causes productivity Wages and treatment Consider McDonalds Are wages low because hamburger flippers are inefficient or are they inefficient because wages are low and neither company nor worker invest in their productivity Higher wages are associated with more hamburgers worker What does this mean Which is it Wages Efficiency or Efficiency Wages Wages and Productivity have diverged in the US since 1975 160 0 140 0 Wages and Productivity 1964 2008 120 0 100 0 80 0 60 0 Grow together 1964 75 Divergence since 1975 40 0 20 0 0 0 4 6 6 6 8 7 0 7 2 7 4 7 6 7 8 8 0 8 2 8 4 8 6 8 8 9 0 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 6 9 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 Output per hour of all persons Wage Index In the orthodox model workers have low wages or are unemployed because they are unproductive It may be a lack of capital and other inputs Or it is lack of education and training Or poor character But it is their own fault Solutions to unemployment and low wages Liberal Education and training to make workers more productive technology Invest in research and development to make workers more productive technology Conservative Tax incentives to the rich to invest in capital to raise MPL factor endowments Incentives to marry and improve morals preferences Ford s 5 day suggests another route You can get what you pay for Pay higher wages and you get more productivity Efficiency Wages Higher wages raise productivity by 1 Reducing quits 2 Reducing absenteeism 3 Improving morale and work effort 4 Company invests in workers to raise their productivity to match pay High road companies reverse the orthodox causality They are productive because they pay high wages High wages cause high productivity rather than the opposite Low road companies compete by paying wages low enough to balance their low productivity Which company is high road 1 2 3 4 Walmart MacDonalds Microsof Home Depot Where would you like to work 1 2 3 4 MacDonalds Google Apple Walmart Efficiency wage systems divide the economy between good and bad jobs High road companies good jobs Profit by raising productivity by treating workers well Wages above market rate ofen with benefits Queues and low turnover Training and job ladders Opportunities for discrimination Low road companies bad jobs Profit at low productivity by paying low wages Wages at market rate with few benefits High turnover short queues Little training few promotion opportunities Less discrimination Efficiency wage companies are more attractive to workers Everyone wants work in a highwage efficient company Low road companies compete by paying low wages Queue for high road jobs Unemployment for workers waiting for high road jobs Efficiency wage theory becomes an argument for industrial policy and trade restrictions We want to high road companies because they make us a more productive country We want more high road companies We want companies that create high productivity and pay workers well We want good jobs Unions help by forcing companies to pay more and treat workers right Union workers are paid more than nonunion workers They earn their pay differential by being more productive Richard Freeman and James Medoff What do Unions Do Should we raise the minimum wage 1 No Orthodox wage theory says it will create unemployment 2 Yes Efficiency wage theory says it will lead to higher productivity What do you think Take away points Orthodox model has productivity determining wages But efficiency wage approach has wages drive productivity pay more and workers will be more diligent and productive High Road companies pay higher wages to create productive workplaces