Pearl works as an administrator in the School of Economics at the University of Cape Town (UCT). Currently, Pearl is working from home for 35 hours a week, and has to answer course-related emails and capture students’ marks for tests and assignments. For this work, Pearl is paid a wage rate of R130 per hour and exerts an effort level of 0.65. The disutility of effort cost is equivalent to a R25 per hour monetary cost to Pearl. If Pearl were to lose her job at the School of Economics, she would be entitled to claim UIF to a value of R65 per hour for a maximum period of 12 weeks. However, given the current job market, Pearl knows it would take 10 weeks to find another administrative job that pays her R130 per hour.

a) Briefly discuss whether the wage of R130 that Pearl is being paid is an efficiency wage or not. Make sure to clearly explain the concept of an efficiency wage in your answer. (I have stated that the concept of an efficiency wage is: An efficiency wage is one that is set above the employee’s reservation wage in order to encourage them to exert effort over and above what they would have done otherwise.)

As part of UCT’s phased return to work, Pearl has been told that she needs to stop working from home and instead report to her office on campus to work from there. Rules and regulations surrounding Pearl’s return to campus include the fact that she needs to do a daily health screening, sanitise at all entrances to buildings and offices, as well as wear a mask throughout the day, even when alone in her office. These rules increase the cost of effort for Pearl to a cost of R40 per hour.

b) Using the labour-discipline model, show how the change in Pearl’s cost of effort would impact on her equilibrium wage and effort levels.