Based on the following description and on the reading by Katz on Efficiency Wages theories, discuss the questions. Description: Among the theories trying to explain the existence of involuntary unemployment, some are based on the principle stressed by Modigliani: "equilibrium situations with unemployment can only happen if some wage rigidity (downwards) exists". One of these explanations is the Efficiency Wages theory, according to which the firms have incentives to reward greater than competitive salaries to their workers.

"In 1914 Ford Motor Company made headlines by offering autoworkers the grand sum of $5 per day, up from $2.50 per day. This wage offer was newsworthy because at that time the typical market wage in manufacturing was just $2 to $3 per day. What was Ford's rationale for offering a higher-than-competitive wage? Statistics indicate that the company was suffering from unusually high quit rates and absenteeism. Ford apparently reasoned that a high wage rate would increase worker productivity by increasing morale and reducing employee turnover. About 10,000 workers applied for employment with Ford in the immediate period following the announcement of the wage hike. According to historians of this era, the Ford strategy succeeded. The $5 wage raised the value of the job to Ford workers, who therefore became loyal to the company and worked hard to retain their high-paying jobs. For 1925, the quit and absenteeism rates both plummeted, and the employee turnover rate dropped down to 16%. Moreover, in 1914 labour productivity at Ford rose by an estimated 51 percent while the profits substantially increased."

a) Use the reading by Katz (1986), specially the summary of Table 1 (page 251),1 to describe the arguments that Efficiency Wage theories invoke to explain the unemployment and its persistency.

b) What argument is always behind the different efficiency wage theories? Which are the conditions for the efficiency wage theories to generate larger involuntary unemployment? Do you think that the greater wage adopted in Ford's factories had actually an impact on the unemployment rate within the Detroit automobile industry? Do you consider this theory helpful to explain the existence of wage dispersion among homogeneous workers?

c) At the time of explaining his decision to raise the wage, Ford mentioned matters like the workers' dignity, the right to provide their families with economic means, etc. Do you believe that, as an economist or manager of a firm, this type of aspects should be taken into account? Or should we instead take decisions based on the principles of the strict economic efficiency? Make some reflections about the relevance that must be given to welfare at the job placement.