Question

INSTRUCTIONS: DEFINE THE FOLLOWING TERMS AND CONCEPTS IN A CLEAR, CONCISE, AND EXPLICIT WAY. DEMONSTRATE THE RELATIONS BETWEEN THEM!

• Reservation wage; Efficiency Wages;

Answer 1

the reservation wage is the lowest wage rate at which a worker would be willing to accept a particular type of job.A job offer involving the same type of work and the same working conditions, but at a lower wage rate, would be rejected by the worker.

An individual's reservation wage may change over time depending on a number of factors, like changes in the individual's overall wealth, changes in marital status or living arrangements, length of unemployment, and health and disability issues. An individual might also set a higher reservation wage when considering an offer of an unpleasant or undesirable job than when considering a type of job the individual likes (see compensation differential.

Just as a worker has an incentive to search for a high wage when looking for a job, a consumer has an incentive toto search for a low price when purchasing a good. The highest price the consumer is willing to pay for a particular product is that consumer's reservation price

The efficiency wage hypothesis  argues that wages, at least in some markets, form in a way that is not market-clearing. Specifically, it points to the incentive for managers to pay their employees more than the market-clearing wage in order to increase their productivity or efficiency, or reduce costs associated with turnover, in industries where the costs of replacing labor are high. This increased labor productivity and/or decreased costs pay for the higher wages.

Because workers are paid more than the equilibrium wage, there may be unemployment. Efficiency wages offer, therefore, a market failure explanation of unemployment, in contrast to theories that emphasize government intervention (such as minimum wages). However, efficiency wages do not necessarily imply unemployment, but only uncleared markets and job rationing in those markets. There may be full employment in the economy, and yet efficiency wages may prevail in some occupations. In this case there will be excess supply for those occupations, but some applicants are not hired and have to work for a probably lower wage elsewhere.

The term "efficiency-wages" (or rather "efficiency-earnings") has been introduced by Alfred Marshall to denote the wage per efficiency unit of labor.Marshallian efficiency wages would make employers pay different wages to workers who are of different efficiency, such that the employer would be indifferent between more efficient workers and less efficient workers. The modern use of the term is quite different and refers to the idea that higher wages may increase the efficiency of the workers by various channels, making it worthwhile for the employers to offer wages that exceed a market-clearing level.