LABRST 3A03 Lecture Notes - Lecture 12: Market Clearing
14 Dec 2017
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Document Summary
In the good state, employment will be at n0 at a wage w* In the bad state, employment will be higher at n0* and wages at w* For workers it represents reduction in the risk (fewer layoffs and constant wages) Firms are paying lower wages (w* < w, the expected wage under market clearing) Firms and workers are better off with risk-sharing. Contract provides a rigid wage, independent of the state that is realized. Layoffs may occur in weak states of demand. The contract wage w* is lower than the market clearing wage in the good state. Both parties benefit from a risk sharing arrangement. The contract represents trade-off between risk sharing and production efficiency. Firms choosing to pay wages above market clearing level. Nutritional efficiency wage model: workers who eat better work harder. Output rise is given by q= f(el), l is supplied inelastic.
