Unit 6 Flashcards
What is Unit 6 about.
Look at the coordination of labour within firms in modern capitalist economies. Model how wages are determined. What does this mean for the sharing of mutual gains arising from cooperation in a firm.
Owner manager worker relationship
- owners decide long term strategies and direct managers to implement
- Managers assign workers these tasks for decisions to be implemented
Ronald coase says about workforce:
- If a worker goes from X to Y department, this is not due to a change in prices - but because he is told to. The distinguishing mark of the firm is the suppression of the price mechanism
- Coase is saying that a firm in the capitalist economy, is a mini privately owned, centrally planned economy, as its top down decision making structure resembles the centralised direction of production in entire economies in communist countries
Firm specific asset =
something person owns or can do that has more value in individuals current firm than in next best alternative.
Firms cant write enforceable contracts specifying exact tasks employees must perform to get paid as:
- can’t know exactly what they need beforehand
- Costly and Time consuming to monitor 24
Therefore incomplete contract
Why dont firms use piece rates?
- Employees rarely work alone, so measuring the contribution of individual workers is difficult
- Very difficult to measure output for some professions like elderly care workers
Employment rent definition
economic rent worker receives at one job compared to next best alternative.
Employment rent per hour =
hourly wage - disutility - reservation wage
When cost of job loss is larger
Worker willing to work harder
Sequential game, owner + maria:
- The employer chooses a wage: this is based on his knowledge of how employees like maria respond to different wages, and informs her she will be employed in subsequent periods at same wage if she works hard enough
- Maria chooses a level of work effort, in response to wage offers, considering the costs of losing her job if she doesn’t provide enough effort
Slope of Maria’s best response curve
Is the MRT and the feasible frontier.
This is the best response curve, the optimal amount of work chosen to perform for each hourly wage
- diminishing marginal returns, at higher levels of wages, same increase in wages has smaller effect on effort.
The employers indifference curves - isocost curves for effort
Curves at which employer gains same utility at different combinations of effort / hour and wages
Why are isocost curves for effort upward sloping
Sloping upwards shows you need higher wages to incentivise harder work. Steeper lines means lower cost of effort as slope is e/w. Slope is also the MRS, as it is the rate a which employer is willing to increase wages for higher effort.
Why are contracts incomplete?
- Information is not verifiable for court of law
- Time and uncertainty in the long run of what to do
- Measurement of output
- Absence of a judicial institution
- Preferences - people involved may not want incomplete contract
What can public policies like provision of unemployment benefits change
reservation wages and BRC so can affect the wage setting process.
