What does the efficiency wage model suggest as an incentive for better performance?

The efficiency wage model suggests that paying an above-equilibrium wage can serve as an effective incentive for improved employee performance. This is based on the idea that higher wages can lead to greater worker productivity for several reasons.

First, when employees are compensated with higher-than-market wages, they are more likely to feel valued and motivated, which can enhance their effort and commitment to the job. This can reduce turnover rates, as employees are less likely to seek other employment opportunities when they perceive their current compensation as favorable.

Additionally, higher wages can attract a more skilled and competent workforce, improving overall productivity. Employers may also find that well-compensated employees have a greater incentive to avoid shirking, as the cost of losing a good job due to underperformance is much higher when wages exceed the equilibrium level.

In contrast, paying a lower than equilibrium wage may lead to higher turnover and decreased motivation among employees, while implementing profit-sharing plans or providing fewer benefits could have varied effects but are not directly linked to the efficiency wage concept in the same way that higher wages are.