Question 6.45 Choose the correct answerRead the following statements regarding the labour discipline model and select the correct one.

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BlackTom AI · Accepted Answer

Employment rent arises whenever a worker receives a wage above their reservation wage, creating a surplus from employment that disciplines effort. 1) Relevant knowledge points and concepts - Reservation wage (w_r): the minimum wage that makes a worker indifferent between being unemployed (or outside options) and employed. - No-shirking wage (w_NS): the wage that, given the probability of detection and the cost of job loss, makes shirking unattractive — i.e., it satisfies the incentive (no-shirking) constraint. - Employment rent: the value (or present discounted surplus) a worker gains from staying employed rather than being unemployed; it increases with the wage premium above the reservation wage. - Labour-discipline model (Shapiro–Stiglitz): firms pay a wage premium to create employment rents so workers do not shirk; firms minimize this premium subject to the incentive constraint. 2) Step-by-step reasoning - If the firm pays wage w and the reservation wage is w_r, the per-period surplus to the worker is w − w_r. - The employment rent is the present discounted value of that surplus while employed. In a stationary setting with discount factor β (0 < β < 1), employment rent E = (w − w_r) / (1 − β). - A positive wage premium (w > w_r) therefore yields E > 0; this positive employment rent gives workers an incentive to avoid losing the job, thereby reducing shirking. 3) Calculations / intermediate steps - Per-period surplus = w − w_r. - Present discounted value (geometric sum) = (w − w_r) + β(w − w_r) + β^2(w − w_r) + ... = (w − w_r)/(1 − β). 4) Why the correct answer is correct - Option c states: "Paying above the worker’s reservation wage results in employment rent." This directly follows from the surplus calculation: any wage above the reservation wage creates a positive surplus whose discounted sum is the employment rent. That is the core mechanism of the labour-discipline model. 5) Why the other options are incorrect - a. "The no-shirking wage will be higher than the worker’s productivity." Not generally true: the no-shirking wage is set by the incentive constraint, not directly tied to marginal productivity; it need not exceed productivity and a profit-maximizing firm will not willingly pay beyond what it can justify. - b. "Employers must set wages equal to workers’ reservation wages to cover the cost of work effort." If wages equaled reservation wages, employment rent would be zero and workers would have no deterrent against shirking—so this fails the incentive constraint. - d. "The employer has to choose the highest wage that gives an employee an incentive to work hard." Firms choose the lowest wage that satisfies the no-shirking incentive constraint to minimize costs, not the highest feasible wage. 6) Conclusion The provided answer (c) is correct: paying above the worker’s reservation wage results in employment rent, which is the mechanism that supports worker effort in the labour-discipline model.

Question 6.45 Choose the correct answerRead the following statements regarding the labour discipline model and select the correct one.Single choice

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