Question

Explain how the introduction of the basic income system will affect the natural unemployment rate by the Efficiency Way model, the Way- Setting Price-Setting model.

Answer 1

Ans.

The efficiency wage model argues that compensation, in some markets can be more then the market forces , this is done to incentivize the labor force to be productive and efficient and to ensure that there is less attrition of the labor force. This increased productivity can compensate for the higher wage cost paid to the workers.
Because we are paying above the market rate , there will be some unemployment because some workers may not find the work at the higher wages. In contract the minimum wages system may reduce the unemployment but it may not be able to improve the productivity.

The model of efficiency wages as coined by Marshall argues that the employer may pay differential wages to different worker class. Higher productive peole may earn higher wages and lower productive people may earn lower wages. However the essence of the argement remains that the higher wages may incentivize the workers for higher productivity while there may be slight uptick in the unemployment.