Diagnosing a Productivity Problem

A tech company pays its programmers a high wage to motivate them to work diligently on complex projects, as their individual output is difficult to measure. The company then introduces a new, invasive monitoring system that tracks keystrokes and screen activity to ensure employees are 'actively working'. If the company keeps the wage the same, how will this new system likely affect the programmers' employment rent (the net value of the job to the employee)?

Analyzing the Role of Wages in Motivating Effort

Critique of a Minimum-Wage Strategy

To motivate an employee to work hard, a firm only needs to pay a wage that is high enough to cover both the employee's next best alternative (their reservation option) and the personal cost of exerting effort.

A firm wants to set a wage high enough to motivate an employee to work hard, even when their effort isn't perfectly monitored. Match each component of this wage-setting problem to its correct description.

An employee's next best job option would pay them $12 per hour, which is their baseline for accepting any job. To perform their current role effectively, they must exert effort that they perceive as a personal cost equivalent to $3 per hour. Their current employer pays them $20 per hour to ensure high performance. What is the value of the employment rent per hour (the net benefit that makes losing the job costly) for this employee? Enter a single number. $____

A firm is trying to determine the minimum wage it must offer to an employee to ensure they work diligently, given that their effort cannot be perfectly monitored. Arrange the following components in the logical order a firm would consider them, starting from the employee's baseline alternative to the final wage offered.

A manufacturing firm pays its assembly line workers a wage significantly above the local average. This strategy is intended to motivate high effort, as individually monitoring each worker's diligence is costly and impractical. The government then significantly increases the value and duration of unemployment benefits available to all citizens. If the firm wants to maintain the same level of worker effort without changing its monitoring practices, how should it respond to this new government policy?

A software company pays its developers a wage significantly higher than their next best alternative to motivate high effort on complex projects where individual performance is hard to track. A major economic downturn then occurs, causing many other tech firms to freeze hiring and lay off staff, making it much harder for a developer to find a new job if they were to be dismissed. Assuming the developers' cost of effort remains the same, how does this change in the external job market affect the minimum wage the company needs to pay to maintain the original level of employee motivation?

Definition of Employment Rent

Determinants of the Employment Rent Needed to Deter Shirking