ECON 2A03 Lecture Notes - Lecture 28: Efficiency Wage, Market Clearing, Perfect Competition
30 Nov 2017
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Contract provides a rigid wage (w*), 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 of rise is given by q(output)=f(el), l is supply inelasticity. Efficiency, e, depends on wage paid e=e(w), quality of work. Normalize the price of rice to one, the firm"s profit is given by. Economic profit = tr- tc = p*q- (wl + rk) Assume the firm has some discretion in setting the wage, the firm reduces labour costs by paying a lower wage, these labour savings may be offset by a drop in labour productivity, so tha lower wage actually reduces profits.
