What are Efficiency wages?

Efficiency wages are higher-than-market wages that employers pay to motivate workers to be more productive, reduce turnover, and attract higher-quality applicants. By offering these wages, firms aim to enhance employee loyalty and performance, as workers are incentivized to work harder to retain their jobs and the associated benefits. This concept suggests that paying above the equilibrium wage can lead to greater overall efficiency within the company. As a result, efficiency wages can sometimes lead to a surplus of labor, as the higher pay attracts more applicants than there are available positions.