Efficiency Wage Models

The Nutrition Model

Assume C = Calorie consumption
H(C) = efficiency of 1 unit of labour. If wages are low we can assume H(C)
= H(W), that is for low wages, all the wage is used to satisfy calorie needs
(consumption).
Total efficiency hour is ℓ.H(C) = ℓ.H(W), where ℓ is number of hours
worked.
Assume employers want to produce y units of output. The problem
becomes:
Min W.ℓ subject to f[ℓ.H(W)] ³ y and W ³ W , where W is the
W, ℓ

opportunity cost of labour. Assume the second constraint is not binding.

The employer minimizes the wage bill subject to at least producing y . This
implies that we can write the Lagrangian as:
L = - wl + l { [ f [l.H (W )]] - y}
¶L
= -l + lf l¢ .H ¢(W ) = 0
¶W
¶L
¢ (W ) = 0
= -w + f H
¶l
For an interior solution we need W > 0 and ℓ > 0, hence:
W = lf ¢H (W ) and l = lf ¢lH ¢(W )

W f ¢H (W ) H (W )
\ = =
l f ¢.lH ¢(W ) lH ¢(W )

Multiply by ℓ and rearrange:

W 1
=
H (W ) H ¢(W )

Average Marginal
cost of an cost of an

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efficiency efficiency
hour hour

W* l
Hence, if we choose W = W* such that we get the
H(W *) H¢(W *)

equilibrium wage.

Efficiency
hours • H(C)
per man,
H(C)
(No. of tasks)

•
W0 W* Consumption (=W)

The shape of the curve shows that at low calorie intake, i.e. if the
wage < W0, no tasks can be performed. Effectively, starving workers
cannot perform tasks. This means H(W) = H(C) = 0. As W rises above W0,
number of tasks rises but eventually falls as calorie consumption rises. In
equilibrium W* is paid to a worker even if W* > W because reducing W*
does not reduce costs as productivity falls as W* falls. This implies that
unemployment can exist with no tendency of wages to fall. Therefore,
equilibrium in such a market is consistent with unemployment. (For more
explanations see Basu)

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Two implications and empirical results
1. We assumed that workers only get a wage and consume it all. But
what if they have other non-labour income? Assume that a worker has his
own land and the output of food that is produced or his share in a
sharecropping arrangement is OA. The model becomes

No of
tasks

H(C)
•

•
0 A Consumption

This means that the tangent from A is steeper than that from the origin, i.e.
efficiency wage paid to the worker is lower, hence these workers are more
attractive to employers and it is quite possible that employers pay different
wages to different workers as long as W* ³ W . In this case there is no
unique equilibrium wage. Wages can differ according to the amount of
non-labour income the worker has, if the employer has knowledge of that
income. In small peasant societies with tied contracts, where the worker
may work on someone’s farm but also sharecrop with them on another plot,
such information is more available.

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The existence of unemployment in equilibrium can be shown as follows.
Wage

W*
W1
n

We assume workers do not have other income. If W*> W1 then W* is paid.

Only if the cost minimizing wage (or the profit maximizing wage) is
greater than W* will the employer pay that wage and hence employs less
workers. Hence the above diagram shows demand for labour and n=n(W*),
or number of workers employed is a function of W*.

Now we introduce labour supply in the above graph. Assume we have m

identical employers, then N=mn(W*)

Assume supply is S*, which is positively related to the wage. The market
will pay a wage of W’. However, if supply is S**, then W* is paid hence
there is excess supply of labour. This is the employment level at the
equilibrium wage. Consequently, the model explains existence of
involuntary unemployment.

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 Wage Demand S*
Excess supply
W’

W*

S**

mn(W*) Aggregate Labour

2. The efficiency wage hypothesis explains a competitive case with

unemployment. However, workers cannot adapt to higher energy intake
immediately but rather do so over time, so we expect to see long run
contracts to be dominant when this type of efficiency wages are important.
This implies that this version of the efficiency wage theory must be a long
run theory. However, most contracts appear to be short run, which is not
supporting this view. However, it seems that when workers are in long run
contract with employers, average calorie intake is higher. Fogel &
Engelman (see Bliss and Stern) show that slaves were consuming more
than average population. The army seems to be another example.

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Empirical Evidence

Evidence for India by Bliss & Stern in support of this theory is not very
strong but one interesting finding was that labourers on long term contracts
had higher per capita consumption of food than short term contract holders.

An interesting study in Guatemala was performed by Immink & Viteri

(Journal of Development Economics, 1981). They looked at 158 male
sugarcane (agricultural) workers (They were chosen because their work
was energy demanding) who worked in two separate communities. One of
these groups were given a high energy food supplement (Let us call them
the H group) and the other a low energy one (Let us call them the L group).
The experiment was run for 28 months. The supplement was a bottled
orange flavoured drink. The high energy one contained 350 kcal/bottle and
the low energy one 15 kcal/bottle. Both groups of workers were energy
deficient (52% of H + 69% of L did not meet 100% energy requirement
daily). Several indicators for productivity were identified.

Results
The H group did not significantly perform better than L group if the
productivity measure is cane/day (tonnes per day). Both groups increased
cane per hour but again no significant difference between the H and the L
groups. In terms of the length of furrow per hour the H performed worse.
Total daily work-time and total energy expenditure increased in both
groups probably because of psychological effects. In general, the
researchers claim that there is no evidence supporting the hypothesis. The
analysis was performed after taking account of other potentially important
characteristics of workers such as their height, weight, reach, bicep size,
etc.

Two comments must be made:

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1) Participants were not chosen at random for H and L drinks. The
communities were chosen. If these two communities were different in
their productivity in an immeasurable way, this distorts the results
(Omitted variable bias).
2) Since the participant knew that they were participating in a short-term
experiment and did not desire to set precedent for higher productivity
in case the company raised the minimum output per day, they may
have deliberately kept output low.

Fahima Aziz (1995) looks at the effect of calorie intake and health on the
productivity of men and women. She finds that calorie intake affects
female productively but not men’s. The effect of health is the reverse.

Strauss's (1986) work is the most thorough study which tests and
quantifies the current nutritional intake on farm productivity using the
household level data from Sierra Leone, thereby testing the Efficiency
Wage Hypothesis. However, the major weakness in Strauss's analysis was
that he did not have individual level data on caloric intake of the household.
Data from Sierra Leone had caloric availability in the market so he used
average caloric intake per consumer equivalent. The household level
caloric variable had to be converted to an average per family worker by
assuming that food consumption was proportional to
approximate caloric "requirements" for a moderately active person given
age and sex. FAO 1957 weights for caloric requirements were used. The
author recognized the weak data on the nutrient intake and concluded that
the nature of the nutrition-productivity relationship remained unanswered
due to the unavailability of the individual level nutrient intake data.

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Conclusion: Whilst this is a very important theory and it should be obvious
that starving workers cannot maximize productivity, empirical testing of
this model is problematic. The reason is that calorie intake-productivity
relationship is a long-term relationship. It is difficult, and very expensive,
to observe workers for such a length of time to properly test the theory.

References:
Ray, D., Chapter 13 looks at this concept from a different angle. The model
that I am presenting is different to the one that is presented in Ray, but they
deal with the same issue.

Basu, K, Analytical Development Economics, 1997, Chapter 10.

Bliss, C., and Stern, N. (1978a) Productivity, Wages and Nutrition: Part I:
Theory, Journal of Development Economics, 5, pp. 331-362.

Bliss, C., and Stern, N. (1978b) Productivity, Wages and Nutrition: Part II:
Theory, Journal of Development Economics, 5, pp. 363-398.

Immink, M., and Viteri, F., (1981), "Energy Intake and Productivity of
Guatemalan Sugarcane Cutters: An Empirical Test of the Efficiency Wage
Hypothesis, Part I" Journal of Development Economics. 9:251-272.

Immink, M., and Viteri, F., (1981), "Energy Intake and Productivity of
Guatemalan Sugarcane Cutters: An Empirical Test of the Efficiency Wage
Hypothesis, Part II" Journal of Development Economics. 9:273-287.

Strauss, John., (1986), "Does Better Nutrition Raise Farm Productivity",

Journal of Political Economy,

Aziz, Fahima, (1995), Nutrition, Health and Labor Produtivity Analysis

of Male and Female Workers: A Test of the Efficiency Wage Hypothesis,
University of Minnesota, Bulletin 95-5.

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There are many efficiency wage models. The following three models are
perhaps the most popular:

1. The Shirking Model: This deals with the notion that workers shirk (do
not maximize their productivity) if they are not monitored properly but
monitoring is costly.

2. The Labour Turnover Model: This argues that labour turnover is costly
and that employers are willing to pay a higher wage to reduce turnover.

3. The Nutrition Model

Whilst the first two models apply equally to developed and developing
countries, the third is usually only relevant to LDCs. In this course
candidates are expected to only know the third model.