ECON lecture10

I am currently watching ECON3302 lecture 10. The topics of the lecture are compensating wage differentials & wage rate determination.

The main points of the first half of the lecture are that:
- Employees will try to maximise their utility
- Wages are not the only factor employees use to measure utility, they also look at work conditions & other benefit schemes
- Two different employees might measure utility very differently, one might prefer a higher wage in a riskier job while the other might prefer a lower wage in a safer job (this also applies to benefit schemes)
- Employers may be able to pay a lower wage by offering higher benefits (eg. retirement plans, health care, shares etc.), whether they will do this or not depends on their isoprofit curve

The main points of the second half of the lecture are that:
- MC = MP(L) in theory
- However worker productivity is unobservable so employers try to use compensation policies to optimize worker productivity & make sure they put in extra effort
- Problem- asymmetric information, only workers know the true amount of effort they are putting in
- Employers should aim for a self-enforcing contract
- Employers will only increase wages if marginal productivity of the worker will also increase (called Efficiency wages)
- Current data suggests: wage < productivity when you start working but as your tenure increases you'll get to a point where your wage > productivity
- Larger firms tend to pay more than smaller firms

The lecture also looked at some studies relating to pay schemes:
The study 'Does Performance Pay Increase Job Satisfaction?' by Green & Haywood (2008) suggests that in terms of performance pay measures, only subjects with profit-sharing schemes had a significantly higher level of job satisfaction.

Previous studies have shown that piece-rate pay schemes increase productivity but may also increase stress. Job satisfaction may decrease if productivity pay is linked to objective measures (workers may put in effort but don't receive the reward they should get, because of this they stop putting in the required effort).