No Shirking

The No-Shirking model – Explained in simple words

The no-shirking model is a labor market theory that is part of the efficiency wage theory and tries to explain why wages are higher than a traditional supply-and-demand analysis would suggest. Whereas the number of people employed changes quite a bit when the economy fluctuates, wages in real terms (that means adjusted to inflation) stay relatively constant over time. Efficiency wages in general and the no-shirking model more specifically are based on the principle that the level of wages determines the productivity of workers.

What are now the specific assumptions of the no-shirking model? The basic underlying assumption of the no-shirking model is that workers are in principle lazy and shirk. Shirking means simply not to work or work less than you are obliged to work according to your contract. It is hard to understand the details of the model without a basic understanding of the term “utility”. Utility is a basic economic concept that tries to rank different choices of individuals. In the no-shirking model, the utility of working according to one’s contract has to be higher than to shirk. As employees are considered lazy in this model, they will either shirk completely, that is not work at all, or work exactly as much as they are supposed to, never more. The model further assumes that there is a certain probability that a worker is caught “shirking” and then is fired. In that case he gets unemployment benefits. The model now proposes that the wage has to be high enough that the utility of working is bigger than the utility of shirking. This is called the no-shirking condition. Only if that is the case, workers are going to work at all and are productive for the company. In that sense the wage level is a disciplinary device for workers as a higher wage increases the loss in utility if one is caught shirking.

Important implications of the no-shirking model are the following:

  1. There will be involuntary unemployment: Since wages are set higher than in a pure supply-and-demand world, there will be workers willing to work for the going wage, but will not find work.
  2. Higher unemployment benefits increase wages and unemployment:The utility of shirking increases if benefits are higher, thus employers have to pay higher wages. This decreases employment.
  3. Higher probability of getting caught shirking decreases wages and unemployment:If it is more likely a worker gets detected not working, the utility of doing so decreases and hence a lower wage is required to prevent shirking. This leads to a lower unemployment rate.
  4. Higher competition leads to lower unemployment and higher wages:If firms compete more intensely, both wages and employment rise.

 


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Dr. E.

Dr. E. has a PhD in Financial Economics and loves giving advice about finances. His mantra is, if you can avoid fees, you win!

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