Class 11 - CHAPTER 11 PAY AND PRODUCTIVITY WAGE...

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CHAPTER 11 PAY AND PRODUCTIVITY: WAGE DETERMINATION WITHIN THE FIRM
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Coming up with the right compensation plan and set of incentives is important. Plans include wages, job training, employee benefits, job security etc. Firms have internal labor markets: Under certain conditions they behave monopsonistically in which they set wages rather than take them as given.
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Workers differ in productivity, work habits, ability. Productivity depends on motivation. Productivity depends on ability, effort, environment. High productivity is also a matter of taking initiatives.
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Employment Contracts Employment relationships can be considered as contracts between employers (principals) and employees (agents). Contracts can be explicit or implicit. Formal Contracts: Lay explicitly all the promises and penalties. Implicit Contracts: Not all tasks are explicitly spelled out (they are incomplete), or it might be difficult to define certain tasks (they are implicit). Most employment contracts are implicit and incomplete.
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The markets suffer from information asymmetries. Adverse Selection: worker’s ability is unobserved Moral Hazard: worker fails to perform as promised Possible solutions: Signaling, Self enforcement
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Motivating Workers Employers need to give the right incentives for workers to perform well. Two most common payment schemes are Piece Rates (or Commission Rates): Payment based on individual output Time Rates: Payment based on the time of work and hourly wage rates Both systems have benefits and problems.
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This note was uploaded on 12/09/2011 for the course ECON 301 taught by Professor Hassan during the Fall '08 term at Rutgers.

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Class 11 - CHAPTER 11 PAY AND PRODUCTIVITY WAGE...

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