Question

10. (a) In the Shapiro-Stiglitz efficiency wage model, why is it important that the employee receives a rent - that is, a wage greater than their opportunity cost of working? (b) Why are imperfect monitoring of shirking behaviour and the existence of unemployment in equilibrium important to ensure that the wage paid embodies a rent? (c) How, if at all, would a worsening of working conditions affect the efficiency wage and equilibrium unemployment?

Answer 1

Answer :

Efficiency wage model is a significant theory in labor economics which unmistakably explain the connection among wage and work productivity. In basic terms efficiency wage model argues that increasing wages can prompt increased work productivity because the workers are feel progressively persuaded to work with higher payment which implies that paying your employees higher than the market wage for their job.

(a) :- In the Shapiro-Stiglitz efficiency wage model, why is it important that the employee receives a rent - that is, a wage greater than their opportunity cost of working?

The shirking model of efficiency wage was created via carl shapiro and joseph stiglitz, another model of effciency wage that the blessing trade model was created by george ackerloff. These folks are bigg hitters in economics-two of them are nobel laurates.

In labor economics shapiro stiglitz model explains about the financial theory of wages and unemployment in labor market equilibrium. It gives a specialized depiction of why wages are probably not going to fall and how involuntary unemployment appears. This theory was first evolved via carl shapiro and joseph stiglitz. The center piece of the theory is that all firm ought to give higher wage to their employers in request to maintain a strategic distance from shirking. Then all organizations attempt to eliminate shirking,which pushes up average wages and decreases empolyment which implies that nominal wages have tendency of down ward rigidity. In equilibrium all organizations pay a similar wage above market clearing and unemployment makes jobloss costly and so unemployment fills in as a laborer descipline device. In the shapiro and stiglitz model workers either work or shirk. In request to make an opportunity cost to shirking firms attempt to raise their wages over the market average.

(b) :- Why are imperfect monitoring of shirking behaviour and the existence of unemployment in equilibrium important to ensure that the wage paid embodies a rent?

In labor economics the efficiency wage hypothesis argues that wages atleast in some work markets, form in a way that isn't market clearing. Specifically it points to the administrators to pay their employees more than the market clearing wage in request to increase productivity but since all organizations do this the market wage itself is pushed up and the outcome is that is wages are raised above market clearing it will make involuntary unemployment.

(c) :- How, if at all, would a worsening of working conditions affect the efficiency wage and equilibrium unemployment?

The shirking model doesn't explain anything about the greater part of the unemployed at any one time are the individuals who are fired for shirking because if the threat associated with being fired is effective. Practically zero shirking and sacking will occur. However the efficiency wage model don't really infer unemployment, but just uncleared markets and job rationing in labor markets.

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