The "efficiency wage" is one possible explanation for rigidities in the economy that leads to economic instability.

Question

Quizplus · Accepted Answer

The idea behind the efficiency wage theory is that paying workers higher than what is necessary to maintain their labor supply can lead to better job performance, reduced turnover, and increased morale. However, this can also lead to rigidities in the labor market, as firms may be unwilling to reduce wages during economic downturns, which can worsen economic instability.

The "Efficiency Wage" Is One Possible Explanation for Rigidities in the Economy