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(a) According to implicit contract theory, why is unemployment considered voluntary? (b) According to efficiency wage...

(a) According to implicit contract theory, why is unemployment considered voluntary?

(b) According to efficiency wage theory, why is unemployment considered involuntary?

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Answer #1

a) implicit contract is an agreement between employer and employee that specifies how much labor is demanded and how much wage will be provided under different circumstances in future. Thus there is no sudden firing or unemployment because of change in the structure of the economy. Hence, if there is unemployment it is voluntary or willingly.

b) efficiency wage theory believes that increase in wages increases labor productivity but labor demand is less at higher wages and thus there is involuntary unemployment. managers tend to pay wages higher than equilibrium wages to labor in order to increase their productivity but they decrease labor demand.

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