Wages, Unemployment, and Monitoring

Week 5 · September 28 and 30, 2026

Why might employers pay more than the lowest possible wage, and how do monitoring and unemployment shape effort?

Opening Hook

Suppose a firm could cut wages tomorrow and still fill every vacancy. Would it? The answer is not always yes. Lower wages may save money, but they can also change effort, turnover, morale, trust, and the quality of applicants.

Here is the question this session is about: why can wages, monitoring, and unemployment discipline work even when effort is hard to contract on directly?

The No-Shirking Logic

When effort cannot be perfectly observed, the employment relationship becomes a strategic interaction. The employer chooses wages and monitoring. The worker chooses effort. A higher wage can create an employment rent, making job loss costly and effort more attractive.

Unemployment matters because it changes the worker’s fallback position. If another equally good job is easy to find, dismissal is less costly. If jobs are scarce, dismissal is a stronger threat.

A wage can be an incentive device, not only a price for labor time.

Does this model make unemployment look like a social cost, a disciplinary device, or both?

Monitoring and Motivation

Monitoring can make shirking easier to detect, but it is not free. It costs resources, may be inaccurate, and can change how workers interpret the relationship. Camerer and Weber’s organizational-economics framing is useful because it treats incentives, information, and social context together.

Better monitoring can reduce one kind of moral hazard while creating another problem: workers may optimize measured behavior rather than valuable behavior.

Monitoring changes behavior partly by changing information and partly by changing the meaning of the employment relationship.

In a no-shirking model, why can unemployment affect effort?

  1. It cannot affect effort.
  2. It changes how costly it is to lose the current job.
  3. It makes every worker intrinsically happier.
  4. It eliminates incomplete contracts.

Review Cards

Connections

Builds on: Session 4, where employment rents and exit became central.

Sets up: Session 6, where the difficulty of measuring individual contributions becomes a team problem.

Reading Guide

Monday, September 28: Monopsony and an introduction to the whole-economy model. Prepare Bowles and Halliday, Chapter 11 sections 11.9-11.15.

Wednesday, September 30: Continue our discussion of Hirschman, Chapters 2-3, then turn to Camerer and Weber, sections 1-3.

Required

Bowles and Halliday. Microeconomics, Chapter 11 sections 11.9-11.15. Canvas/library.

What to look for: The model linking wages, unemployment, monitoring, and effort.

Camerer and Weber. First three sections. Canvas/library.

What to look for: How organizational economics frames coordination, incentives, and behavior inside firms.

Hirschman. Exit, Voice, and Loyalty, Chapters 2-3. Canvas/library.

What to look for: How exit and voice work over time, especially when loyalty changes the response to dissatisfaction.