Alright. So now let's discuss efficiency wages a bit. Some employers pay a wage above equilibrium as an incentive to their employees. They might say, "I know this job should pay $10 an hour, but I'm going to pay you $12 an hour." Why would they do that? There are a few reasons. This wage above the equilibrium is called an efficiency wage, and it's supposed to increase the efficiency of the worker. So how does it do it?

First, it deals with decreased worker turnover. Decreasing worker turnover is beneficial because you don't have to retrain new workers if you can keep the same workers. That's going to improve your efficiency, right? And why does it decrease worker turnover? Well, in the workers' minds, they're making $12 an hour when similar people are making $10 an hour. If they lost this job, they would have to accept a lower-paying job. So the opportunity cost of losing this job is higher to them, right? Because they would have to take a lower-paying job. In this case, the worker wants to keep the job because of the higher wage.

Next is worker quality. If you're fired, you're likely going to have to accept a lower-paying job, right? The same idea. So, the quality of the workers that you can attract is higher, so you're going to get higher worker quality. So when you put out the job ad and you're saying, "Hey, I'm hiring for $12 an hour," you're going to get a lot more people applying to the job. So you can handpick who you think is going to be the best because you have more people applying to your job. You can get a better worker out of it.

Lastly, the worker effort. The workers are going to be motivated to perform well to avoid being fired. Right? They want to avoid being fired, so they are going to have higher worker effort because they don't want to be fired, so they want to make sure that you see that they're doing a great job and they're doing their best so that they would keep this higher paying job. So the efficiency wage, in essence, acts as an incentive to the employee to work harder. To be more efficient. Efficiency wage, higher wage, more efficient worker. That's about it here. Let's go ahead and pause and move on to the next video.