Chapter 42 Question ○36

Why do employers sometimes offer wages that are above par in order to attract the high-quality workers they want, or to attract a sufficient number of workers? (George Aykerlof) Competitive labor market theory holds that employers need only offer wages at the level necessary to attract the right workforce.But in many companies, there will be countless high-quality applicants competing for every vacant position.Can't these companies pay less wages to make higher profits? One possible reason is that providing incentive wages helps ensure honest behavior by employees.Workers who are only paid market rate wages have little reason to worry about losing their jobs.After all, in a fully competitive labor market, the number of jobs at market prices is essentially constant.But jobs with rewarding wages are not easy to find.

So, employees who are lucky enough to get a job like this have a strong financial incentive to do whatever it takes to keep it.In particular, employees who received incentive wages were less likely to be demotivated than those who received market wages.If companies can mitigate slowdowns in this way, they can still make a profit even if they need to pay incentive wages.