Editing Labour economics (section)

==Asymmetric information==
[[File:Sabah Sarawak labour advert Kuala Lumpur.JPG|thumb|right|An advertisement for labour from Sabah and Sarawak, seen in [[Jalan Petaling]], Kuala Lumpur]]
In many real-life situations, the assumption of perfect information is unrealistic. An employer does not necessarily know how hard workers are working or how productive they are. This provides an incentive for workers to [[Laziness|shirk]] from providing their full effort, called [[moral hazard]].<ref name=":03">{{Cite book|title=Managerial economics : a problem solving approach|last1=Froeb|first1=Luke M.|last2=McCann|first2=Brian T.|last3=Shor|first3=Mikhael|last4=Ward|first4=Michael R.|isbn=978-1-305-25933-1|edition=Fourth|location=Boston, MA|oclc=900237955|year = 2016}}</ref> Since it is difficult for the employer to identify the hard-working and the shirking employees, there is no incentive to work hard and productivity falls overall, leading to the hiring of more workers and a lower unemployment rate.

One solution that is used to avoid a moral hazard is [[Employee stock options|stock options]] that grant employees the chance to benefit directly from a firm's success. However, this solution has attracted criticism as executives with large stock-option packages have been suspected of acting to over-inflate share values to the detriment of the long-run welfare of the firm. Another solution, foreshadowed by the rise of [[temporary work]]ers in Japan and the [[Haken-giri|firing of many of these workers]] in response to the financial crisis of 2008, is more flexible job- contracts and -terms that encourage employees to work less than full-time by partially compensating for the loss of hours, relying on workers to adapt their working time in response to job requirements and economic conditions instead of the employer trying to determine how much work is needed to complete a given task and overestimating.{{citation needed|date=October 2020}}

Another aspect of uncertainty results from the firm's imperfect knowledge about worker ability. If a firm is unsure about a worker's ability, it pays a wage assuming that the worker's ability is the average of similar workers. This wage under compensates high-ability workers which may drive them away from the labour market as well as at the same time attracting low-ability workers. Such a phenomenon, called [[adverse selection]], can sometimes lead to market collapse.<ref name=":03" />

One way to combat adverse selection, firms will try to use [[Signalling (economics)|signalling]], pioneered by [[Michael Spence]], whereby employers could use various characteristics of applicants differentiate between high-ability or low-ability workers. One common signal used is education, whereby employers assume that high-ability workers will have higher levels of education.<ref name=":04"/> Employers can then compensate high-ability workers with higher wages. However, signalling does not always work, and it may appear to an external observer that education has raised the marginal product of labour, without this necessarily being true.

=== Search models ===
{{Main article|Search theory|Matching theory (macroeconomics)}}
One of the major research achievements of the 1990–2010 period was the development of a framework with dynamic [[search theory|search]], matching, and bargaining.<ref>{{cite press release|url=https://www.nobelprize.org/uploads/2018/06/press-12.pdf|title=The Prize in Economic Sciences 2010|date=October 11, 2010|access-date=January 26, 2023|publisher=[[Royal Swedish Academy of Sciences]]|website=NobelPrize.org|agency=Nobel Prize Outreach AB}}</ref>