efficiency wage
TRANSCRIPT
Efficiency - In economics
1 Efficiency wages, paying workers more than the market rate for increased productivity
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Theory of the firm - Other models
1 Efficiency wages|Efficiency wage models like that of Shapiro and
Stiglitz (1984) suggest wage rents as an addition to monitoring, since this gives employees an incentive not to shirk, given a certain probability of detection and the consequence of
being fired
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Unemployment
1 Behavioral economics|Behavioral economists highlight individual
biases in decision making, and often involve problems and solutions concerning sticky wages and
efficiency wages.
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Index of economics articles - E
1 * Ecological economics – Econometrics – Economic base analysis – Economic calculation problem – Economic equilibrium – Economic
geography – Economic graph -Economic growth – Economic history – Economic impact of immigration to Canada – Economic indicator –
Economic model – Economic policy – Economic problem – Economic rent – Economic surplus – Economic system – Economics – Economics
terminology that differs from common usage – Economies of agglomeration – Economies of scope – Economy of scale – Ecotax –
Edgeworth box – Edgeworth's limit theorem – Efficiency wages – Efficient-market hypothesis – Elasticity (economics) – Electricity market – Employment – Endogeneity (economics) – Endogenous growth theory
– Energy economics – Entrepreneur – Entrepreneurial economics – Entrepreneurship – Environmental economics – Environmental finance – Equilibrium selection – Ethical consumerism – Euro – Event study –
Evolutionary economics – Exceptionalism – Excess burden of taxation – Exogenous growth model – Expected utility hypothesis – The Experience Economy – Experimental economics – Externality
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JEL classification codes - Labor and demographic economics JEL: J Subcategories
1 ::JEL: J41 – Contracts: Specific Human Capital, Matching models, Efficiency
wage Models, and Internal labor markets
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Opportunism - Economic opportunism
1 *shirking, involving some kind of negligence, or failure to acquit
oneself of a duty (or a responsibility) previous agreed or implied (see also
efficiency wages).
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Agency Theory
1 Various mechanisms may be used to align the interests of the agent with
those of the principal. In employment, employers (principal) may use piece rates/Commission (remuneration)|
commissions, profit sharing, efficiency wages, performance measurement (including financial statements), the
agent posting a bond, or the threat of termination of employment.
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Agency Theory - Employment contract
1 Because of differences in the quantity and quality of information available about the performance of individual employees, the ability of employees to bear risk, and the
ability of employees to manipulate evaluation methods, the structural details of individual contracts vary widely, including such mechanisms as piece rates, [share]
options, discretionary bonuses, promotions, profit sharing, efficiency wages, deferred
compensation, and so on.
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Agency Theory - Deferred compensation
1 e.g., Loewenstein and Sicherman 1991, Frank and Hutchens 1993.) For
example Akerlof and Katz 1989: if older workers receive efficiency wages, younger workers may be
prepared to work for less in order to receive those later
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Feminist economics - Homo economicus
1 The work of George Akerlof and Janet Yellen on efficiency wages based on notions of fairness provides an example of a feminist model of
economic actors. In their work, agents are not hyperrational or isolated, but instead act in
concert and with fairness, are capable of experiencing jealousy, and are interested in personal relationships. This work is based on
empirical sociology and psychology, and suggests that wages can be influenced by fairness considerations rather than purely
market forces.
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Economic equilibrium - Interpretations
1 Modern mainstream economics points to cases where equilibrium
does not correspond to market clearing (but instead to
unemployment), as with the efficiency wage hypothesis in labor
economics
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Employment Protection Legislation - On firm efficiency and profits
1 operated in a context of efficiency wages, by inducing more stable
relationships with the workers and reducing their job and income
insecurity, EPL could allow them to pay lower wages, without reducing the effort provided by the labour force employed, with beneficial
effects on profits.
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Involuntary unemployment
1 Economists have several theories explaining the possibility of
involuntary unemployment including implicit contract theory,
Disequilibrium macroeconomics|disequilibrium theory, staggered
wage setting, and efficiency wages.
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Involuntary unemployment - Explanations
1 In efficiency wage models based on shirking, employers are worried that workers may shirk knowing that they
can simply move to another job if they are caught
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Involuntary unemployment - Explanations
1 This type of involuntary unemployment is consistent with
Keynes's definition while efficiency wages and implicit contract theory
do not fit well with Keynes's focus on demand deficiency.
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Efficiency wages
1 In labor economics, the 'efficiency wage' hypothesis argues that wages, at least in some markets, form in a
way that is not market-clearing
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Efficiency wages
1 There may be full employment in the economy, and yet efficiency wages may prevail in some occupations
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Efficiency wages
1 The term efficiency-wages (or rather efficiency-earnings) has been introduced by Alfred
Marshall to denote the wage per efficiency unit of labor.Alfred Marshall, Principles of Economics,
London (Macmillan , 8th ed., Ch, VI.III.10 [http://www.econlib.org/library/Marshall/marP45.html#Bk.VI,Ch.III] Marshallian efficiency wages would make employers pay different wages to workers who are of different efficiency, such
that the employer would be indifferent between more efficient workers and less efficient
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Efficiency wages - Overview
1 There are several theories (or microfoundations) of why managers pay efficiency wages (wages above
the market clearing rate):
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Efficiency wages - Overview
1 * Avoiding shirking: If it is difficult to measure the quantity or quality of a worker's
effort—and systems of piece rates or Commission (remuneration)|commissions are
impossible—there may be an incentive for him or her to shirk (do less work than
agreed). The manager thus may pay an efficiency wage in order to create or increase
the cost of job loss, which gives a sting to the threat of firing. This threat can be used
to prevent shirking (or moral hazard).
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Efficiency wages - Overview
1 * Sociological theories: Efficiency wages may result from traditions. George Akerlof|Akerlof's theory (in very simple terms) involves higher wages encouraging high morale,
which raises productivity.
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Efficiency wages - Overview
1 * Nutritional theories: In developing countries, efficiency wages may
allow workers to eat well enough to avoid illness and to be able to work harder and even more productively.
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Efficiency wages - Overview
1 The model of efficiency wages, largely based on shirking, developed
by Carl Shapiro (professor)|Carl Shapiro and Joseph E. Stiglitz has
been particularly influential.
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Efficiency wages - Shirking
1 One criticism of this and other flavours of the efficiency wage
hypothesis is that more sophisticated employment contracts can under
certain conditions reduce or eliminate involuntary unemployment
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Efficiency wages - Labor turnover
1 On the labor turnover flavor of the efficiency wage hypothesis, firms
also offer wages in excess of market-clearing (e.g
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Efficiency wages - Selection
1 Thus high-wage firms are paying an efficiency wage – they pay more,
and, on average, get more (see e.g
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Efficiency wages - Sociological efficiency wage models
1 Akerlof (1982) provided the first explicitly sociological model leading to the efficiency wage hypothesis
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Efficiency wages - Empirical literature
1 Ford’s decision to increase wages so dramatically (doubling for most
workers) is most plausibly portrayed as the consequence of efficiency
wage considerations, with the structure being consistent, evidence of substantial queues for Ford jobs,
and significant increases in productivity and profits at Ford
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Efficiency wages - Empirical literature
1 As one counter to over-enthusiasm for efficiency wage models, Leonard (1987) finds little support for either shirking or turnover efficiency wage models, by testing their predictions
for large and persistent wage differentials
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Market-clearing - On market clearing
1 For example, in the theory of efficiency wage hypothesis|efficiency
wages, a labor market can be in equilibrium above the market-
clearing wage, since each employer has the incentive to pay wages
above market-clearing to motivate their employees on the job
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History of macroeconomic thought - Labor market failures
1 Of these theories, new Keynesians were especially associated with
efficiency wages and the insider-outsider model used to explain
hysteresis (economics)|long-term effects of previous unemployment,
where short-term increases in unemployment become permanent
and lead to higher levels of unemployment in the long-run.
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History of macroeconomic thought - Efficiency wages
1 In efficiency wage models, workers are paid at levels that maximize
productivity instead of clearing the market
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George Akerlof - The Market for Lemons and Asymmetric Information
1 In Efficiency Wage Models of the Labor Market, Akerlof and coauthor
Janet Yellen (his wife) propose rationales for the efficiency wage
hypothesis in which employers pay above the market clearing|market-
clearing wage, in contradiction to the conclusions of neoclassical
economics.
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Janet Yellen - Selected works
1 * Yellen, Janet L, 1984. Efficiency Wage Models of Unemployment,
American Economic Review, American Economic Association, vol.
74(2), pages 200-205
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Compensating differential - Area characteristics
1 The authors include other variables based on two other theories: efficiency wage and
search theory
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Iron law of wages - Mainstream criticism
1 Many modern economists believe firms pay their workers a premium over subsistence levels to make
them more efficient. In the theory of efficiency wages, firms pay above
market clearing wages so that there is some level of unemployment, which discourages workers from
shirking or switching firms.
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Paul Milgrom - Labor Markets
1 Macroeconomic models, including real business cycle models, efficiency
wage models and search/matching models, have long had difficulty
accounting for the observed volatility in labor market variables
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Herbert Gintis
1 'Herbert Gintis' (born February 11, 1940 in Philadelphia, Pennsylvania) is an American economist, behavioral
scientist, educator, and author. He is notable for his theoretical
contributions to sociobiology, especial altruism, cooperation,
epistemic game theory, gene-culture coevolution, efficiency wages, strong
reciprocity, and human capital theory.
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Labor-force participation rate
1 Behavioral economics|Behavioral economists highlight individual
biases in decision making, and often involve problems and solutions concerning sticky wages and
efficiency wages.
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