Question

3) Finally, let’s consider productivity and pay. Answer the following questions in a couple of sentences. a) If labor markets are perfectly competitive (many identical employees, many small firms), why must every employee be paid exactly their productivity? In other words, we do we not expect to see firms earning profit off of their employees nor employees earning more at one firm than they could be paid at another similar firm? b) If moving to another firm costs an employee money (either in psychological terms from having to uproot oneself, or in financial terms from having to pay for a moving company and other expenses associated with moving), why might we see firms paying their employees less than the employee’s productivity? c) If the employee has firm specific human capital, why might we see her earning more than any other firm would pay her? Why also might we see her being paid less than her productivity at the current firm? d) Why might an employee with considerable firm specific human capital be less likely to leave his job the longer he is at the company? Consider both the company and the employee

Answer 1