The Paradox of Labor Discipline With Heterogenous Workers

The introduction of “effort inducible” and “no effort: workers into a standard labor discipline model results in a paradox of sorts: if firms/capitalists cannot tell the difference, the predictable reductions in both output and workers compensation lead to an increase in profits. The resolution is found in the difference in expected productivities of workers woth and without contracts, which creates a reputation effect. When the relative proportions of workers are made variable – the consequence of the acquisition and depreciation of productive skills, and a source of positive feedback – the model exhibits multiple equlibria for plausible parameter values.