Again the result is involuntary unemployment according

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Unformatted text preview: ghest possible union indifference curve just touches the grey labour demand curve. Union indifference curve are horizontal to the right of L0 since the union is not concerned with the employment of these outsiders. Let the economy be hit by an adverse shock which shits the labour demand down to the blue posiCon. New equilibrium is at point 2. Real wages rise to w2 and unemployment is higher at LS2 ­L1 than it was before. Efficiency wages theory Efficiency wages argues that because of specific knowhow that can only be acquired within the firm and because of turnover (hiring and firing) costs, insiders can extract a premium over the wage for which outsiders are willing to work. Again, the result is involuntary unemployment. According to the efficiency wage theory, raising the real wage may lower costs per unit of output by raising labour producCvity. Thus, labour producCvity not only depends on the amount of capital with labo...
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This note was uploaded on 03/11/2013 for the course ECON ES20013 taught by Professor Martin during the Spring '12 term at University of Bath.

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