New version page

UMass Amherst ECON 103 - Class 22 Efficiency wages Fall 2014

This preview shows page 1-2-15-16-17-32-33 out of 33 pages.

View Full Document
View Full Document

End of preview. Want to read all 33 pages?

Upload your study docs or become a GradeBuddy member to access this document.

View Full Document
Unformatted text preview:

Slide 1Slide 2Slide 3Slide 4Slide 5Management is about getting people to work hardSlide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Orthodox Model: Productivity is exogenousFordist Model: Treatment causes productivityConsider McDonaldsWhich is it? Wages => Efficiency or Efficiency => Wages?Wages and Productivity have diverged in the US since 1975Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Efficiency wage companies are more attractive to workersSlide 29Slide 30Slide 31Slide 32Slide 33Poodles are special.Wages, Marginal Revenue Products, and Efficiency WagesDoes 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 workersCapitalists 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 hardOther 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 motivationHenry Ford and the $5 dayHenry Ford and the Model TModel 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 themWorkers 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 lineHis company was more productive because it paid higher wages.His name entered the language.Ford challenged the orthodox model of the labor marketIn 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 viewDemand curve is the MRP curve, MRP=P*MPL.Supply curve reflects the value of time doing other things, leisure or home productionOrthodox Model: Productivity is exogenousFordist Model: Treatment causes productivityWages and treatmentConsider McDonaldsAre 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 19751964.1966.1968.1970.1972.1974.1976.1978.1980.1982.1984.1986.1988.1990.1992. 1994.1996.1998.2000.2002.2004.2006.2008.0.020.040.060.080.0100.0120.0140.0160.0Wages and Productivity: 1964-2008Output per hour of all persons Wage IndexGrow together 1964-75Divergence since 1975In the orthodox model, workers have low wages or are unemployed because they are unproductiveIt 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 wagesLiberalEducation and training to make workers more productive (technology).Invest in research and development to make workers more productive (technology).ConservativeTax 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 routeYou 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 causalityThey 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. Walmart2. MacDonalds3. Microsof4. Home DepotWhere would you like to work?1. MacDonalds2. Google3. Apple4. WalmartEfficiency wage systems divide the economy between “good” and “bad” jobsHigh road companies/good jobsProfit 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 jobsProfit 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 workersEveryone wants work in a high-wage, 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 restrictionsWe want to “high road” companies because they make us a more productive country.We want more “high road” companiesWe want companies that create high productivity and pay workers well.We want good jobs.Unions help by forcing


View Full Document
Loading Unlocking...
Login

Join to view Class 22 Efficiency wages Fall 2014 and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Class 22 Efficiency wages Fall 2014 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?