An employee's total payoff from working diligently for a duration of $h$ weeks is calculated by multiplying the weekly payoff (wage $w$ minus the cost of effort $c$) by the number of weeks worked. The calculation is represented by the formula: Total Payoff = $(w - c) \times h$.

Employee's Total Payoff from Working

The total payoff for a shirking worker is the sum of the payoffs from two periods. It is calculated by adding the payoff from the first $s$ weeks (wage $w$ multiplied by $s$) to the payoff from the remaining $h-s$ weeks (reservation wage $w_r$ multiplied by $h-s$). The formula is: Total Payoff = $(w \times s) + (w_r \times (h - s))$.

Employee's Total Payoff from Shirking

The variable 'h' represents the worker's planning horizon. It is the total period, measured in weeks, that a worker considers when calculating and comparing the total payoffs from different employment choices, such as working diligently versus shirking.

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The labour discipline model presents the firm's social interaction as a sequential game between employers and employees, aiming to solve the problem of incentivizing hard work. The model shows that firms can motivate effort by offering a wage with an employment rent, which is lost upon dismissal. A foundational assumption of this model is that employees assess the risk of being fired for shirking by using an expected detection time (`s`), despite the event being inherently a matter of chance. A key output of the model is the no-shirking wage curve, which specifies the minimum wage needed at different employment levels to deter shirking.

The Labour Discipline Model

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

The variable 's' represents the expected duration, measured in weeks, that an employee who is shirking can expect to remain employed before being caught. This timeframe is dependent on the employer's capacity to monitor the employee's work. As a key component of the labour discipline model, 's' is a critical determinant of the economic rent required to motivate an employee to exert effort.

s (Expected Shirker Detection Time)

The no-shirking wage curve illustrates the minimum wage a firm must offer for any given employment level to prevent shirking. The curve's specific position and slope are influenced by a variety of labor market parameters. The equation for this curve is derived from the worker's reservation wage plus an employment rent, which must be large enough to offset the cost of effort and deter shirking. Key economic factors that act as determinants include unemployment benefits and the overall unemployment rate, as detailed in Section 6.9 of the source material.

The No-Shirking Wage Curve Equation and Its Determinants

The wage-setting model demonstrates how firms can set wages to fulfill two key objectives: to recruit and retain the necessary workforce, and to provide employees with a strong incentive to work hard. This model, depicted in diagrams like Figure 6.15, is used to find a firm's profit-maximizing wage and employment level by overlaying its isoprofit curves onto its feasible set of (N, w) combinations. The feasible set consists of all points on or above the no-shirking wage curve, and the optimal choice for the firm is the combination of wage and employment on the highest possible isoprofit curve within this set.

The Wage-Setting Model

The no-shirking wage curve is positioned above the reservation wage curve because the no-shirking wage must be high enough to cover both the worker's reservation wage and an additional amount for employment rent. This rent compensates for the cost of effort and ensures it is more beneficial for the employee to work than to shirk. Consequently, the no-shirking wage curve lies above and is typically modeled as parallel to the reservation wage curve, which itself represents an upward-sloping relationship between the required wage ($w$) and the level of employment ($N$).

Position of the No-Shirking Wage Curve Relative to the Reservation Wage Curve

One way firms can motivate employees is by ensuring there is a significant cost to being fired. This cost, known as employment rent, can be increased by raising wages. A higher employment rent instills a fear of job loss in the employee, creating a powerful incentive to work hard to avoid being dismissed. Therefore, setting wages above the minimum required for recruitment becomes a key strategy for managers to ensure employee effort.

Raising Wages to Increase Employment Rent and Incentivize Effort

The labour discipline model is a sequential game involving an employer and an employee. In this game, the employer acts first by setting a wage. However, to determine the most profitable wage, the employer must first analyze and anticipate how the employee will react to different wage offers in terms of their work effort. Therefore, the employer's strategic analysis must begin by considering the employee's perspective and potential response, which then informs the employer's own optimal wage choice.

Sequential Nature of the Labour Discipline Game

In practice, employers often use supervisors or surveillance equipment to monitor employees. However, the labour discipline model simplifies this by assuming these direct monitoring costs are ignored. Instead, the model posits that the employer occasionally receives enough information to determine if an employee is not working adequately. While this information is too imprecise to support a piece-rate contract, it is considered sufficient to justify firing an underperforming worker.

Monitoring and Firing Assumption in the Labour Discipline Model

A central problem within the labour discipline model is to determine the wage required to motivate a specific employee, such as Maria, to work diligently. The analysis of her decision begins with the determination of her personal reservation wage ($w_r$). This value serves as the benchmark against which she will compare the wage ($w$) offered by her employer, ultimately informing her choice between exerting effort or shirking.

Determining the No-Shirking Wage for an Individual Employee (Maria's Case)

Within the labour discipline model, a firm's profit from an employee is the difference between the value of the output the employee produces and their wage. This calculation is based on the premise that an employee generates a certain amount of output (`y`) when working diligently, but produces nothing if they shirk.

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