Unformatted text preview: Ford’s high-wage policy had many of the effects predicted by efficiency-wage theory. Turnover fell, absenteeism fell, and productivity rose. Workers were so much more efficient that Ford’s production costs were lower even though wages were higher. Thus, paying a wage above the equilibrium level This story illustrates a general phenomenon. When a firm faces a surplus of workers, it might seem profitable to reduce the wage it is offering. But by reducing the wage, the firm induces an adverse change in the mix of workers. In this case, at a wage of $10, Waterwell has two workers applying for one job. But if Waterwell responds to this labor surplus by reducing the wage, the competent worker (who has better alternative opportunities) will not apply. Thus, it is profitable for the firm to pay a wage above the level that balances supply and demand. W ORKERS OUTSIDE AN EARLY FORD FACTORY...
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- Spring '10
- Ford Motor Company, 5-a-day wage