Principles of Economics- Mankiw (5th) 579

Principles of Economics- Mankiw (5th) 579 - CHAPTER 26 U N...

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CHAPTER 26 UNEMPLOYMENT AND ITS NATURAL RATE 597 The novel insight of efficiency-wage theory is that paying high wages might be profitable because they might raise the efficiency of a firm’s workers. There are several types of efficiency-wage theory. Each type suggests a differ- ent explanation for why firms may want to pay high wages. Let’s now consider four of these types. WORKER HEALTH The first and simplest type of efficiency-wage theory emphasizes the link between wages and worker health. Better paid workers eat a more nutritious diet, and workers who eat a better diet are healthier and more productive. A firm may find it more profitable to pay high wages and have healthy, productive workers than to pay lower wages and have less healthy, less productive workers. This type of efficiency-wage theory is not relevant for firms in rich countries such as the United States. In these countries, the equilibrium wages for most workers are well above the level needed for an adequate diet. Firms are not
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