The Economy 2.0 — Microeconomics

Take a closer look at the units of the microeconomics volume of The Economy 2.0: what they’re about, what models they present, how they’re changing compared with The Economy 1.0.


Unit 6 — The firm and its employees


In Unit 6 we highlight the distinctive features of employment and illustrate how the interactions among the firm’s owners, managers, and employees influence wages, work, and profits.



This unit introduces principal-agent relationships in a search and matching model with an incomplete labour contract. It integrates the employer’s dual problems of recruiting workers, and motivating them to work. The resulting wage-setting model explains how firms set wages to maximize profit. The model is applied to the issue of minimum wages.


Major changes

The new labour market model describes what the labour market is like. Namely, workers are different and mobility frictions make it a long process to look for, find, and secure an employment contract. When they get one, workers enter a long-term relationship with their employer which is governed by long-term, but incomplete contracts. This is the natural setting for the labour discipline model, which now also integrates a search-and-matching model to account for frictions created by firms’ monopsony power.


You can find more information in the slides prepared by CORE Econ author Margaret Stevens.


The header

This is the header we’ve chosen for Unit 6.

It shows a woman working on her laptop. This unit discusses a model of how firms recruit workers and motivate them to work.

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