Unemployment and Efficiency Wages

Question 1

Definition of Unemployment

Answer 1

Individual is unemployed if they do not have a job but are actively seeking work (different from non-participation in the labour market)

Question 2

Implications of sticky wages

Answer 2

shortage of demand for labour (impediment to wage adjustment)

Question 3

If sticky wages, why do wages not fall to clear labour market?

Answer 3

Incentive for firms to pay efficiency wages

Question 4

Reasons for efficiency wages

Answer 4

1) Moral hazard problem

2) Asymmetric information problem

Question 5

what role does positive unemployment play in the labour market (with efficiency wages)

Answer 5

Creates incentives for workers to exert effort: if no eff. wage, firms would all pay the same market clearing wage, can obtain the same pay in another job (no unemployment risk) therefore no incentive to exert effort

e(w, w*,u) increasing in u