Question

In the efficiency wage model with the efficiency wage above the market-clearing wage, when employment is at its full-employment level:

A.) there is an excess supply of labor.
B.) there is an excess demand for labor.
C.) there could be either an excess demand for, or an excess supply of, labor.
D.) labor supply equals labor demand.

Answer 1

In the efficiency wage model, setting the wage above the market-clearing rate results in an excess supply of labor, as more workers are attracted to the higher wage than there are jobs available.

Step-by-step explanation:

Within the efficiency wage model, where the efficiency wage is set above the market-clearing wage, the situation leads to an excess supply of labor. This is because the higher wage attracts more workers than there are jobs available, resulting in unemployment.

In the standard supply-and-demand model of labor markets, equilibrium is achieved when the wage adjusts so that the quantity of labor supplied equals the quantity of labor demanded. However, the efficiency wage model proposes that employers pay a higher wage to increase worker productivity.

Which does not equate to equilibrium in the labor market, thus leading to an excess supply of labor even when employment is at its full-employment level.