The idea that employment rents are an incentive for employees to work harder is illustrated in a study by Edward Lazear (an economic advisor to former US President George W. Bush) and his co-authors. They investigated a single firm during the global financial crisis, to see how the managers and workers reacted to the turbulent economic conditions. The firm specializes in technology-based services such as insurance-claims processing, computer-based test grading, and technical call centres, and operates in 12 US states. The nature of the work made it easy for the management of the firm to track the productivity of workers, which is a measure of worker effort.

It also allowed Lazear and his colleagues to use the firms data from 20062010 to analyse the effect on worker productivity of the worst recession since the Great Depression.

When unemployment rose, workers could expect a longer spell of unemployment if they lost their job. Firms did not use their increased bargaining power to lower wages as they could have, fearing the reaction of their employees.

Lazear and his co-authors found that, in this firm, productivity increased dramatically as unemployment rose during the financial crisis. One possible explanation is that average productivity increased because management fired the least productive members of the workforce. But Lazear found that the effect was more due to workers putting in extra effort. The severity of the recession raised the workers employment rent for any given wage, and they were therefore willing to work harder. We would predict from our model that the best response curve would have shifted to the left as a result of the recession. This meant that (unless employers lowered wages substantially) workers would work harder. Apparently, this is what happened.¹⁶

Edward P. Lazear, Kathryn L. Shaw, and Christopher Stanton. 2016. Making Do with Less: Working Harder during Recessions.Journal of Labor Economics34 (S1 Part 2): pp. 333-360.

1. the pre-crisis period (2006)
2. the crisis years (20078)
3. the post-crisis year (2009)

Assume that the employer did not adjust wages: Is there a reason why a firm might not cut wages during a recession?