Efficiency Wage Models
Basic idea is that labor productivity depends on the real wage paid by the firm. Thus, if the firm cuts wages, it may end up harming profits instead.
Shirking Model
Intuition: Since workers have discretion over their performance and monitoring is costly, wage in excess of market-clearing levels may provide incentives to minimize shirking. This equilibrium entails unemployment, which works as a disciplining device. The firm hires up to the point where a lower wage would increase the incentive to slack by "too much."
Labor Turnover
Intuition: Firms offer wages in excess of market clearing as a way to reduce labor turnover which is expensive for the firm. Furthermore, the existence of involuntary unemployment reduces turnover.
Adverse Selection
Intuition: This problem occurs before the implementation of the contract, and thus is the opposite of the moral hazard problem (agent changes behavior after contract). In the labor market, this would mean that employers want to offer higher-than-market-clearing wages in order to especially attract high-productivity people to their pool of applicants.
Sociological Model
Intuition: An example is the fair wage hypothesis that emphasizes how importance equity is to workers. If workers don't feel they are being paid what they deserve, they will find a way to get even.
***Points missed on previous exams:
- For monetary policy to have real economic effects in menu cost models, you need BOTH nominal and REAL rigidities. For example, the fact that firms don't want to change prices is part of their concern that it won't bring down their MC anyway (input-output tables).
- In a small open economy with fixed exchange rates, MONETARY policy is more powerful than fiscal policy for stimulating economic activity.
- Both the new Keynesian and traditional IS curve use the REAL interest rate. LM curve uses the nominal. Stickiness is not assumed by new Keynesian models, rather it is explained within a rational framework.
- Tax cuts can be contractionary policy (i.e. government spends less).