What is the theory of efficiency wages?
Efficiency wage theory posits that an employer must pay its workers high enough so that workers are incentivized to be productive and that highly skilled workers do not quit.
What is no shirking condition?
The model now proposes that the wage has to be high enough that the utility of working is bigger than the utility of shirking. This is called the no-shirking condition. Only if that is the case, workers are going to work at all and are productive for the company.
Which model is an economic theory of wages and unemployment in Labour market equilibrium?
In labour economics, Shapiro–Stiglitz theory of efficiency wages (or Shapiro–Stiglitz efficiency wage model) is an economic theory of wages and unemployment in labour market equilibrium.
What is the meaning of cyclical unemployment?
Cyclical unemployment is the component of overall unemployment that results directly from cycles of economic upturn and downturn. Unemployment typically rises during recessions and declines during economic expansions.
What is shirking in finance?
Financial Terms By: s. Shirking. The tendency to do less work when the return is smaller. Owners may have more incentive to shirk if they issue equity as opposed to debt, because they retain less ownership interest in the company and therefore may receive a smaller return.
How does efficiency wages lead to unemployment?
Consequence of Efficiency Wage Instead of market forces causing the wage rate to adjust to the point at which supply equals demand, the wage rate will be higher and supply will exceed demand. This produces higher wages for those who are employed but higher levels of unemployment.
Why would an employer pay the efficiency wage?
Specifically, it points to the incentive for managers to pay their employees more than the market-clearing wage to increase their productivity or efficiency, or to reduce costs associated with employee turnover in industries in which the costs of replacing labor are high.
What factors prevent the market from clearing in efficiency wage models?
Various labour market imperfections, such as imperfect information and contracts, imperfect monitoring, labour turnover costs, psychological motivations for higher than the market-clearing wages, endogenous labour market frictions due to job creation and job destruction, and of course efficiency wages, characterise the …
How is equilibrium wage determined?
In a competitive labor market, the equilibrium wage and employment level are determined where the market demand for labor equals the market supply of labor. Like all equilibrium prices, the market wage rate is determined through the interaction of supply and demand in the labor market.
What is meant by equilibrium unemployment?
Underemployment equilibrium, also referred to as under-employment equilibrium or below full employment equilibrium, is a condition where employment in an economy persists below full employment and the economy has entered an equilibrium state that sustains a rate of unemployment above what is considered desirable.
What is Luddite fallacy?
The term “Luddite fallacy” was coined to describe the thinking that innovation would have lasting harmful effects on employment. The view that technology is unlikely to lead to long-term unemployment has been repeatedly challenged by a minority of economists. In the early 1800s these included Ricardo himself.