| Bonding Critique | A criticism of the efficiency wage model that predicts permanent wage differentials across firms. It suggests that efficiency wage models self-destruct in the long-run because workers who wants a job in high-wage industries will be willing to pay employers for the right to be employed in such job.
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| Delayed-Compensation Contracts | Employment contracts offered by the firm where the wage during the initial years on the job is below a worker=s value of marginal product, and where the wage in the later years on the job is above the worker=s value of marginal product.
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| Dual Labor Markets | A model of employment and wage determination which envisions two distinct types of labor markets: the primary market an the secondary market. The primary market offers high wages, good working conditions, employment stability, and chances for promotion. The secondary market offers low wages, poor working conditions, high turnover, and few chances for promotion.
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| Efficiency Wage | The wage where the marginal cost of increasing the wage exactly equals the marginal gain in productivity of the firm's workers.
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| Free-Riding Problem | The incentive for each worker to shirk when individual compensation is based on team performance.
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| Incentive Pay |
A compensation package designed to elicit particular levels of effort from the worker; an incentive pay plan ties worker pay directly to performance.
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| Piece Rates | A system which compensates the worker according to some measure of worker's output (i.e., the number of pieces they produce).
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| Principal-Agent Problem | The inevitable conflict of interest which occurs when agents (e.g., managers) pursue their own objectives to the detriment of meeting the principal's (e.g., owners) objective.
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| Profit-Sharing | A payment plan which redistributes part of the firm's profits back to the workers.
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| Ratchet Effect |
A negative effect of incentive pay plans for workers. A common problem in the former Soviet Union, the ratchet effect occurs when managers reduce piece rates because more volume is produced than was expected. The ratchet effect discourages workers from accepting piece-rate jobs.
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| Spot Labor Market | The labor market in which firms decide how many workers to hire at given wage; and workers decide how many hours to work in "each period".
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| Time Rates | A system which the compensation depends only on the number of hours the worker allocates to the job and has nothing to do with the number of units the worker produces, at least in the short run.
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| Tournament | A compensation scheme which bases payments on relative performance on the job.
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