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Tim Worstall on ‘Efficiency Wages’

After reading this blog post, Tim Worstall sent me this e-mail (below) in which he makes a typically brilliant Worstallian point:


For Aaron the Aaron.

Sure, OK, efficiency wages. Pay more, get greater productivity. Fair enough, let us just assume that is so. On the grounds that you can only ever really understand the implications and effects of something if you do work through it as the proponents claim it will work.

Higher pay leads to greater productivity of labour, that is the claim.

Higher productivity of labour is also the same statement as less labour being used for any given level of output.

That is, the higher productivity coming from efficiency wages is the same statement as a higher minimum wage costs jobs.


My spin: unless those who use the “efficiency-wages” theory to justify minimum-wage hikes assume massive, widespread, and inexplicable failure of profit-hungry employers to take easy steps to become more profitable, their analysis is internally contradictory, for it would then imply that all the world’s demands for economic outputs can be supplied by a single hour of labor from one very highly paid, and hence one very productive, worker.  “Efficiency wages,” contrary to some of the implications of careless claims about them often made to justify raising the minimum wage, do not suspend the law of diminishing marginal productivity.