If the efficiency wage theory holds,
A) wage rigidity that perpetuates a recessionary gap is transformed from a temporary phenomenon to a permanent feature.
B) self-correction will automatically eliminate a recessionary gap.
C) increases in real wages will be required to eliminate a recessionary gap.
D) increases in nominal wages will be required to close a recessionary gap.

Question

Quizplus · Accepted Answer

The efficiency wage theory suggests that firms may choose to pay their workers above-market wages in order to increase productivity and reduce turnover. This can create wage rigidity, as firms are hesitant to lower wages and risk losing their skilled, productive workers. Therefore, if the efficiency wage theory holds, wage rigidity will become a permanent feature, making it difficult for the economy to self-correct and eliminate a recessionary gap.

If the Efficiency Wage Theory Holds