The analysis of an employee's (Maria's) choice to exert effort begins by establishing the fundamental variables for comparison. These are the weekly wage ($w$) offered by her employer and her personal reservation wage ($w_r$), which represents the value of her next best alternative.

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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)

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

This exercise involves analyzing how an employee's (Maria's) employment rent is affected by various hypothetical scenarios. For each scenario, students are required to create diagrams similar to Figure 6.9 and provide written explanations. One specific scenario for analysis is the impact of new technology that improves a firm's ability to monitor its workers, both on-site and remotely.

Activity: Analyzing Changes in Maria's Employment Rent

This example provides the specific parameters for Maria's employment situation, which are used to calculate her employment rent. She earns a wage of \$12 per hour for a 35-hour workweek and provides the effort her employer expects. This scenario serves as a basis for demonstrating how employers can use employment rents as a tool to motivate employees to work hard.

Maria's Employment Scenario (Wage: $12/hour, Workweek: 35 hours)

This example specifies key numerical parameters for analyzing Maria's employment situation within the labour discipline model. Her cost of effort, representing the disutility of work (`c`), is valued at \$2 per hour. Additionally, her planning horizon (`h`) is set at three years (156 weeks). This timeframe is what she considers for supporting herself and her family and is used to compare the value of her current job against the next best alternative of unemployment. These parameters are crucial for determining her employment rent and the no-shirking wage.

Parameters for Maria's Case (Cost of Effort c = $2/hour, Planning Horizon h = 156 weeks)

In Maria's case, her net utility while unemployed is valued at \$6 per hour. This figure, which accounts for income sources like government aid and family support minus the disutility of joblessness, represents a key component for evaluating her reservation option. However, it is important to distinguish this hourly utility from the total value of her reservation option, which also includes the potential benefit from finding a new job.

Maria's Net Utility Per Hour While Unemployed ($6/hour)

This example outlines a specific set of assumptions for an exercise focused on employment rent. In this scenario, Maria's current job pays $12 per hour for a 35-hour week, and her disutility of effort is valued at a cost of $2 per hour. If she were to lose this job, she would receive $4 per hour in unemployment benefits, but would also incur psychological and social costs equivalent to $1 per hour. It's assumed her planning horizon is 156 weeks, and she anticipates being unemployed for 44 weeks before finding a new job with the same wage and effort requirements.

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