Principles of Economics- Mankiw (5th) 580

Principles of Economics- Mankiw (5th) 580 - 598 PA R T N I...

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598 PART NINE THE REAL ECONOMY IN THE LONG RUN shirking their responsibilities are fired. But not all shirkers are caught immediately because monitoring workers is costly and imperfect. A firm can respond to this problem by paying wages above the equilibrium level. High wages make workers more eager to keep their jobs and, thereby, give workers an incentive to put for- ward their best effort. This particular type of efficiency-wage theory is similar to the old Marxist idea of the “reserve army of the unemployed.” Marx thought that employers benefited from unemployment because the threat of unemployment helped to discipline those workers who had jobs. In the worker-effort variant of efficiency-wage theory, unemployment fills a similar role. If the wage were at the level that balanced sup- ply and demand, workers would have less reason to work hard because if they were fired, they could quickly find new jobs at the same wage. Therefore, firms raise wages above the equilibrium level, causing unemployment and providing an
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