Efficiency and Effectiveness in Relation to Pay Systems Essay

Efficiency and Effectiveness in Relation to Pay Systems - Essay Example This essay stresses that a perfect equilibrium is achieved when demand equals supply thus implying that everyone who is willing and able to work is working at that level of pay. If there are more people looking for employment, the pay will go down. This is because employers’ demand more people as wages goes down hence reducing unemployment. Therefore, this theory argues that if the pay is allowed to move up and down, it is an effective signal to the market and it will contribute to economic stability. This paper makes a conclusion that an efficiency wage system gives employers the ability to choose and pick among numerous applicants in order to get the best ones possible. The second factor that prompts managers to adopt efficiency pay system is intention to avoid shirking. Firms may frequently find it difficult to measure the quality and quantity of efforts of a particular worker because the systems of commissions or piece rates may prove impossible and therefore there is a possibility of the employee to do less work than agreed (shirking). As a result, the firm may decide to pay an efficiency wage with an aim of increasing or creating the cost of job loss thereby giving a sting to job firing threat. Threat such as this can be used to avoid moral hazard or shirking. Thirdly, sociological factors have been cited in relation to efficiency wages; these wages may be because of the firm’s traditions. Akerlof and Yellen argue that the firm may have been using this system to enhan ce high morale among employees thus raising productivity.