Non-clearing equilibrium on the labour market as a consequence of rational behaviour (model of trade-off between wage level and monitoring)

One of the employer's problems in his relationship to the employee is limited enforceability of work-quality. There are two types of instruments: the employer has at hand while motivating employees for higher efficiency - higher wage as a carrot and monitoring as a stick. These two instruments can be mutually substitutable. The more costly the supervision is, the more convenient for the employer is to substitute it by the wage increase. The key determinant for wage level of individual employee is not only the labour productivity, which is usually considered, but the degree of monitoring costs as well. The above mentioned approach allows us to explain the existence of above-equilibrium wage level in the environment of rational behaviour. We are not dealing with a market failure, the employers maximize their profits. As a consequence there is involuntary unemployment on the labour market persisting in the long-run.

Keywords: unemployment, wages, efficiency wage models, monitoring