Monday 727

 Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 9 The Real Economy in the Long Run
Chapter 28 of 36 Unemployment
Section 17 of 21
...
In this chapter we discuss four explanations for long-run unemployment
-1- frictional unemployment
-2- minimum wage laws
-3 - unions and collective bargaining
-4- efficiency wages
…
-4- Efficiency Wages
The theory of efficiency wages holds firms can operate more efficiently and profitably if they pay wages above equilibrium level.
The unemployment that arises from efficiency wages is similar to that arising from minimum-wage laws and unions.
Unemployment results from paying wages above the level that balances the quantity of labor supplied and the quantity of labor demanded.
An important difference is efficiency wages are set at the discretion of the firm, while minimum-wage laws and union wages are forced on the firm.
…
Efficiency wage theory holds government and union forced wage levels are unnecessary, because firms are better off paying wages above equilibrium level.
Normally, we expect profit maximizing firms to want to keep costs including wages paid as low as possible.
The insight of efficiency wage theory is paying high wages might be profitable, because they can raise the efficiency of workers, and not incur the costs of employee underperformance and turnover.
… …
equilibrium level wages
kinkō suijun chingin
均衡水準賃金
… …
From textbook: “The unemployment that arises from efficiency wages is similar to that arising from minimum-wage laws and unions.”
How do efficiency wages create unemployment? Gemini:
Efficiency wages create unemployment because employers voluntarily set pay rates above the market-clearing equilibrium to boost productivity, reduce costly turnover, and discourage worker "shirking."
When wages are held above this natural balance, two things happen simultaneously:
-firms demand fewer workers because labor is more expensive
-more people enter the job market seeking these high-paying roles
Because efficiency-wages-paying firms don’t cut wages —knowing that lower pay would reduce employee effort and morale— wages cannot adjust downward to clear the market, leaving a persistent surplus of job seekers unable to find work.
…
When efficiency-wage firms shrink their hiring, the displaced workers flood the remaining "non-efficiency" sectors of the economy, driving wages in those lower-paying jobs down.
Workers then face a choice: take a low-paying job, or remain unemployed while actively searching and waiting for an opening at a high-paying efficiency-wage-paying firm.

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