The efficiency-wage theory predicts that
A) profit-maximizing firms will maintain the wage level at a rate too low to achieve full employment in the labor market.
B) wage rigidities will be eliminated even in the short-run.
C) firms will maintain the wage level at a rate too high to achieve full employment in the labor market.
D) the labor market clears at a wage rate above equilibrium.

Question

Quizplus · Accepted Answer

According to the efficiency-wage theory, firms maintain the wage level at a rate higher than the equilibrium wage rate to motivate workers to be more productive and reduce their turnover rate. This leads to an excess supply of labor at the higher wage rate and unemployment above the natural rate. Therefore, choice C is the correct answer.

The Efficiency-Wage Theory Predicts That