the labour discipline model Flashcards
What is the labour discipline model, and how does employment rent affect worker effort?
Workers put in more effort when the cost of job loss (employment rent) is high to avoid losing their job.
Higher wages → higher employment rent → greater incentive to work hard.
Describe the game between employer and employee (Maria) in the labour discipline model.
Employer chooses wage (knowing how effort responds).
Maria chooses effort (balancing wage benefits vs. cost of effort & risk of job loss).
Nash Equilibrium: Both choose optimal strategies given the other’s choice.
What is Maria’s best response to different wages?
At reservation wage ($6): Effort = 0 (job loss doesn’t hurt her).
Above $6: Higher wage → higher effort (due to increased employment rent).
Diminishing returns: Effort rises steeply at low wages but flattens at high wages (disutility of effort increases).
What shape is the best response curve, and why?
Concave (flattening at high wages):
Low wages: Small wage hikes → big effort gains.
High wages: Extra $1 → smaller effort gains (effort becomes costly).
Slope = Marginal Rate of Transformation (wage → effort).
How does unemployment duration affect the best response curve?
Longer expected unemployment → higher employment rent → Maria exerts more effort at any wage.
The best response curve shifts upward if unemployment duration rises.
What is the employer’s feasible set, and what is Point J?
Feasible set: Wage-effort combinations on Maria’s best response curve.
Point J: Example where wage = $12, effort = 0.5, unemployment duration = 44 weeks.
Why does effort not increase proportionally with wage?
Disutility of effort: At high effort levels, working harder becomes more unpleasant.
Diminishing marginal returns: Extra $1 buys less additional effort as wage rises.
What happens if wage = reservation wage ($6)?
Effort = 0 (Maria indifferent to job loss).
Employer gets no output → must pay above $6 to incentivize effort.
Why does Maria have bargaining power in the labour discipline model?
She can walk away if wages are too low.
Effort is chosen by her, not dictated by the employer.
The employer can only set the wage and indirectly influence effort via the best response curve.
What is the employer’s key trade-off when setting wages?
Higher wages → more effort (due to employment rent).
But higher wages reduce profits if effort doesn’t rise enough.
Goal: Find the wage that minimizes cost per unit of effort (w/e)
What is the cost of effort (w/e), and how does the employer minimize it?
Cost of effort = wage ÷ effort
Employer minimizes w/e by choosing the wage where the isocost line is tangent to the best response curve (Point A, wage = $12).
What is an isocost line for effort, and what does its slope represent?
Joins points with the same e/w ratio (effort per dollar).
Slope = e/w (e.g., 0.045 effort units per $1).
Steeper slope = lower cost of effort (better for profits).
Why is Point A (wage = $12) the employer’s optimal choice?
It’s the tangency point between the best response curve and the steepest feasible isocost line.
Here, MRS (slope of isocost) = MRT (slope of best response curve).
Any other wage (e.g., $10 at Point C) gives a higher cost of effort (w/e).
What are efficiency wages, and why do employers use them?
Wages set above reservation wage to incentivize effort.
Employers maximize e/w (effort per dollar) rather than minimizing wage alone.
How does the model explain involuntary unemployment?
Equilibrium requires unemployment: If jobs were plentiful, workers could easily rehire after being fired → zero employment rent → no effort.
Employers must pay high enough wages so job loss is costly, but this reduces job openings.
Result: Some workers are willing to work at $16/hour but can’t find jobs.
What three key insights does the labour discipline model provide?
Nash Equilibrium: Employer sets wage; Maria chooses effort optimally.
Employment Rent: Effort is driven by fear of losing rent.
Employer Power: Threat of job loss lets employers extract effort, boosting profits.
Why can’t the economy reach full employment in this model?
Full employment → no fear of job loss → workers exert zero effort.
Employers must keep wages high and jobs scarce to maintain effort incentives.
Thus, involuntary unemployment is necessary for equilibrium.
What four factors determine the position of the best response curve?
Utility of wage goods (what wages can buy)
Disutility of effort (how much workers dislike working)
Reservation wage (fallback option if unemployed)
Probability of being fired at each effort level
How does higher unemployment shift the best response curve?
Lowers reservation wage (workers more desperate for jobs).
Increases employment rent (longer job search if fired).
Shifts curve LEFT → workers exert more effort at same wage (fear job loss more).
How do unemployment benefits affect the best response curve?
Raise reservation wage (better fallback option).
Reduce employment rent (less fear of job loss).
Shifts curve RIGHT → workers exert less effort at same wage.
Why does the best response curve cross the horizontal axis at the reservation wage?
At reservation wage (e.g., $6), employment rent = 0 → worker provides zero effort (indifferent to job loss).
How do economic policies (e.g., unemployment benefits) create conflict between owners and employees?
Right shift (higher benefits): Favors workers (less effort needed for same wage).
Left shift (higher unemployment): Favors owners (more effort at lower cost → higher profits).
At a wage of $18, how might effort differ if unemployment rises vs. benefits rise?
Higher unemployment: More effort (curve shifts left).
Higher benefits: Less effort (curve shifts right).
Why are unemployment policies controversial in this model?
Workers prefer higher benefits (right shift → better bargaining power).
Owners prefer higher unemployment (left shift → cheaper effort, more profits).
