Efficiency Wage Theory

There are many reasons why the relationship between health and labour market outcomes in developing economies is of special interest. First and foremost, there is a long tradition of theoretical models of nutrition-based efficiency wages in the development literature. Efficiency wage models are based on a convincing and coherent explanation as to why firms may find it unprofitable to cut wages in the prevalence of involuntary unemployment.

This theory basically has alternative implications in explaining the contract farming, internal labour market, higher wage payments, reduction or shirking of work by employees, improvement in average quality of job applicants, real wage rigidity, the dual labour market, the existence of wage distributions

Among all other different types of efficiency wages models, the pioneer is the nutrition-based model that was originated in the development economics literature and has been applied to LDCs (Romaguera 1991). This hypothesis is relevant in the primary sector, but in the secondary sector it is (wage-productivity relationship) weak or non-existent, which seeks the idea and thought beyond the purview of new Keynesian one.

However, nutrition-based efficiency wage model is one of the most prominent micro foundations of the efficiency wage theory. The hypothesis was first advanced in the context of less developed countries. ‘Why labour productivity should depend on real wage paid by farms in less developed countries’ was the basic inquiry that paved the path for bringing the issues of health and illness in the wage-productivity linkage.

The study on the theory of labour productivity, health and wages through the efficiency wage hypothesis is pioneered by Leibenstein (1957). It has been formalized and extended later by many others like Mirlees (1975), Rodgers (1975),Bliss and Stern (1978). Leibenstein (1957) in his seminal article ‘The Theory of Underemployment in Backward Economies’ assumed the case of disguised unemployment or visible underemployment and started his argument following Nurkse (1957) view of employing surplus labour on the construction of

The hypothesis stems from the idea that under certain circumstances it would benefit the landowner to pay a wage above the competitive level, and the wage never goes down to zero.

This was the crucial point where Leibenstein brought the often-neglected idea regarding the relationship between wage level and productivity. The whole idea of nutrition-based efficiency wage was based on the relationship between wages and productivity, i.e., in poor economies where wages determine workers’ consumption level, the amount of workers’ effort would depend positively on their nutrition and health status, and thus on wages.

The amount of work that a labourer can be expected to perform depends on his energy level, his health and his vitality, which in turn depend on his consumption level and on the nutritive value of his food intake. What is the important point of his analysis is that the wage productivity linkage was examined in two parts: (1) the relation between income (wage) and nutrition and (2) the relation between nutrition and productivity. It was also indicated that additional experimental and empirical evidence relating not only calorie intake but also other nutritive elements, either directly or indirectly through their effects on debilitating diseases, absenteeism, and lethargy, should