Which labor market outcome is consistent with the

Solution

Efficiency Wage Theory posits that productivity (effort) is positively related to the wage paid. Firms may find it profitable to pay a wage above the market-clearing level for several reasons: · Reduced Shirking: Higher wages increase the opportunity cost of being fired, incentivizing workers to exert more effort. · Reduced Turnover: Workers are less likely to quit, saving the firm recruitment and training costs. · Improved Quality: Higher wages attract a better pool of applicants. Crucially, this can lead to involuntary unemployment because the high wage rate (set by the firm) creates a labor surplus.