Briefly describe the efficiency wage theory

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a) Describe the factors that influence wage setting. Write down the equation that represents wage setting, describe the effect of each factor in the equation/function, and draw the corresponding diagram. Clearly state the assumptions behind your analysis.

b) Briefly describe the “efficiency wage” theory. Explain why a firm would want to pay a wage that is higher than the market wage rate. What theories can motivate such a practice?

c) The conventional (classical) labor market theory suggests that i) the wage rate adjusts smoothly so that labor supply equals labor demand; ii) wages are set competitively across markets; iii) there is no ‘involuntary’ unemployment (anyone who wishes to work can work). Does this reflect the reality in real economies? If not, explain why

Reference no: EM131085857

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