Short Run Analysis

• Wage is set above the market wage due to the added benefits of paying a higher wage.
  • Increased productivity
  • Less job turnover
  • Lower recruiting costs
• Higher Wage$\Rightarrow$   Higher Cost of Losing Job$\Rightarrow$   Lower Monitoring Cost$\Rightarrow$   Increase Employment.

• $$\frac{d l}{d w} = \frac{-\partial^2 \pi / \partial w \partial l}{\partial^2 \pi / \partial l^2}.$$ (1)

  
  

• Determine efficiency wage based on no-shirking condition such that,
  $$\begin{array}{llll} V^N &=& \textrm{The level of utility g... ...e level of utility gained from not working.}\\ \end{array}$$

• Set $V^N = V^S$
• Result: The no-shirking wage,

  $$w_{ns} = \bar{w} + e + \frac{e(r+s+q)}{D(1-q)}.$$ (2)

  
  

Figure 3: Efficiency Wage Model