lecture_5 - Attracting and retaining qualified employees...

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ECOS3003 Lecture 5 1 Attracting and retaining qualified employees Two objectives of compensation policy (2) to motivate employees to be more productive here examine (1) Contracting objective: Owners want to design compensation package that attracts and retains employees with required skills at lowest possible cost
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ECOS3003 Lecture 5 2 Level of pay Basic competitive model - labour market competitive (firms price takers) - market wage rates costless observable - individuals are identical in their training and skills - all jobs are identical (risk, location, etc) - no long term contracts - all compensation $ compensation (ie no fringe benefits) In this case q* of employees determined where MRP = w
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ECOS3003 Lecture 5 3 What if individuals are not identical? Signalling model (Spence) Before contract signed, ex ante an employer cannot tell whether a worker is productive or not Workers signal their productivity by getting an education - employers see education and can tell the productivity of a worker and offer a wage accordingly - High productive workers get education, low productive workers do not (in separating equilibrium)
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ECOS3003 Lecture 5 4 Key element : - more productive workers have a lower disutility of education, hence can separate themselves from low types - high types need to get enough education to make it not profitable for low types to ‘pretend’ that they are of high type ie high types get just enough education that it would not be worthwhile for a low type to also get that much education
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ECOS3003 Lecture 5 5 Model of signalling two types of worker L and H (outside option 0 for both) type L has productivity 0 type H has productivity 1 employers competitive, therefore wage must equal expected MRP
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lecture_5 - Attracting and retaining qualified employees...

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