employment rent Flashcards
What is employment rent?
The difference between the value of having a job (wages, benefits, status) and the next best alternative (unemployment). Workers care about losing their jobs because employment rent exists.
List 6 reasons why employees put in a good day’s work.
Reward (pay, bonuses)
Work ethic (personal values)
Responsibility toward coworkers
Gratitude toward employer
Higher pay/promotion opportunities
Fear of job loss
Do workers care if they lose their jobs? Why?
Yes, because most jobs provide employment rent—the difference between the job’s value and the next best option (unemployment). Firms don’t pay the minimum acceptable wage, so losing a job has real costs.
How do employment rents benefit employers?
Reduces turnover (workers stay to avoid losing rent).
Enables threats (firing risk motivates effort).
What factors determine employment rent?
Benefits of working: Wages, firm-specific assets (friends, location), insurance, status.
Costs of working: Disutility of effort, commute.
Unemployment alternatives: Benefits, informal work.
unemployment rent formula
Employment Rent = (Wage − Reservation Wage − Disutility of Effort) × Expected Lost Work Hours
maria earns 12/hr, effort cost = 2/hr, unemployment lasts 44 weeks (1540 hours). if herreservation wage is 6 whats her total employment rent?
rent/hour = 12 - 6 - 2 = 4
total rent = 4 x 1540 hrs = $6160
What is a reservation wage?
The lowest wage a worker would accept for a job with no disutility (e.g., Maria’s is $6). Unemployment benefits or informal income affect this.
What is the principal-agent problem?
A conflict of interest where:
Principal (employer) wants effort.
Agent (worker) prefers less effort.
Contracts are incomplete (effort isn’t enforceable).
What is a hidden action problem?
When the agent’s actions (e.g., effort) affect the principal but can’t be observed/verified, leading to conflicts (e.g., worker slacking off).
Why can’t contracts cover everything?
Due to:
Unverifiable/asymmetric info.
Measurement difficulties (e.g., effort).
Time/uncertainty.
Lack of legal enforcement.
