A standard efficiency wage model pays workers higher wages in order to increase worker efficiency. As a result, firm profits increase and there is a pool of involuntarily unemployed workers. This equilibrium comes about in part because
A) the firm pays workers according to a tournament.
B) workers are less likely to shirk when there is a pool of unemployed workers who are willing to take their job.
C) the firm agrees to not replace labor with capital.
D) workers are unaware of the pool of unemployed workers as long as they keep their job.
E) workers will do anything to be paid a higher wage.

Question

Quizplus · Accepted Answer

Efficiency wage models suggest that by paying higher wages, firms can reduce shirking among employees because the cost of losing the job (and the high wage) is greater when there is a pool of unemployed workers ready to take their place. This creates an incentive for workers to perform well to avoid being replaced.

A Standard Efficiency Wage Model Pays Workers Higher Wages in Order