Final answer:
Firms will not reduce real wages during a recession based on the efficiency wage model because it could harm worker effort and productivity. Higher wages maintained by firms are often justified if matched with greater productivity; however, if not, it can lead to limited hiring or other cost-saving measures by firms. Hence, the correct answer is option (C).
Step-by-step explanation:
According to the efficiency wage model, during a recession, firms will not reduce real wages because this would reduce worker effort and productivity. The primary reason firms maintain higher wages is to ensure that employees stay motivated and efficient. Even during difficult economic times, lowering wages can be counterproductive by adversely affecting the morale and efficiency of workers, potentially leading to a decrease in overall production and increased costs associated with turnover and training new staff.
From both the union and firm's perspective, there are considerations beyond immediate wage costs. If union workers' higher wages are compensated with higher productivity, then a firm can justify paying these wages. However, if increased wages are not met with increased productivity, it can result in lower profits or even losses for the firm.
In this context, while unions push for higher wages believing that workers benefit, they also must recognize the potential for decreased hiring and other cost-cutting strategies firms may adopt, such as outsourcing or automation.