efficiency wage models Flashcards
What is the dual function of wages?
They affect productivity, as well as providing income to workers/costs to firms.
What suggests the labour market is not perfectly competitive?
Downward pay rigidity and high involuntary unemployment.
What do efficiency wage models show?
That involuntary unemployment exists because firms have an incentive to pay workers more than the minimum required to attract them.
This is bc higher wages induce effort and helps to retain and recruit workers.
What are features of the efficiency wage model?
Providing effort involves a disutility of effort, and unemployment is also costly, as unemployment benefits are lower than wages.
The level of effort exerted depends on the wage/ job environment.
What do firms lack?
Firms have imperfect information about worker productivity.
