Efficiency Wages
Efficiency wages is a concept introduced by Janet Yellen. The concept is that the marginal product of labor is affected by the wage rate. Under this framework, the marginal product is a function of the real wage and labor hours so that mpn(n, w). Specifically, let it be this function,
mpn(n, w) = α * n^(α - 1) * (w^(γ) - w^(**))^(α), 0 < α < 1, 0 < γ < 1, w^(**) > 0
where w^(**) is the reservation real wage below which the worker chooses unemployment. The optimal decision-making condition of firms continues to be that which we had in class,
mpn(n, w) = (Ω + q^(FILL)w) / (q^(FILL))
where w > 0, n = q^(FILL) * vacs = 1, Ω > 0, 0 < q^(FILL) < 1, and is taken as given by the firm, and w > 0 is taken as given by the firm. The firm chooses how many vacancies to post and knows that vacancies vac transform into hours worked in the following way, n = q^(FILL) * vac. Assume that workers and firms separate from their iol each period so that s = 1.
