Question

Describe the two informational problems that arise in work effort in the efficiency wage model

Answer 1

The efficiency wage theory states that, suppose the firm increase its profit by raising employees wages and salaries. In this condition, the wages cannot reach equilibrium with demand and supply in the labor market. The informational problem arises in the efficiency wage theory is that,

Moral Hazard

The moral hazard problem arises from the effort of workers. That means workers cannot change their behavior because they well protected against low productivity and lower returns. The workers know that the low effort will make suffer the employers. The employers cover this problem with paying premiums, bonuses, also rising the wages. However, again, the workers getting efficiency wages or higher wages than anywhere in the labor market.

Adverse selection

It is from the story behind of selection procedure. At the time of recruitment, the firm uses suitable techniques to find out the bad workers. However, the exact quality of workers will know only after the selection criteria or for a long time. However, employers can offer high wages because they want to recruit more productive workers.