In the labor market, contracts are often designed to include a variable salary component that is tied to some measure of performance. Why?
A) Such contracts provide workers with the incentive to work hard.
B) Most people are risk-loving and thus variability in their compensation leads to higher total utility.
C) Labor unions demand a variable salary component.
D) The variable component reduces wages paid by firms.

Question

Quizplus · Accepted Answer

Variable salary components tied to performance provide incentives for workers to increase their effort and productivity, aligning their interests with those of the firm. This can lead to improved outcomes for both parties.

In the Labor Market, Contracts Are Often Designed to Include