Transcript Efficiency Wage Models of Unemployment
Models of Unemployment
Natural Rate of Unemployment
• What determines the long run rate of unemployment – Location of LRAS and LRPC • Why is it not zero?
• Or Why is the wage above the market clearing wage rate?
• Competitive labour market has zero unemployment.
• Defn:
Involuntary
Unemployment: Would accept job at going wage rate if offered – Not chairman of IBM
W W 1 L D S • Wages are real • Wage at W 1 • Excess supply of labour – Unemployment • Wage bid down to W 0 – Eqm restored • So unemployment will occur if the wage does not fall for some reason.
• Always ask why!
Efficiency Wages
• Efficiency Wages explain why wage will not fall to market clearing level.
• Basic idea: wage influences productivity – Firm won’t want to pay a low wage – Labour is not like any other good and wage is not like any other price • Examples: – Nutrition – Turnover – Applicant pool – Monitoring
Shirking
• Look at the monitoring version of efficiency wages in detail – Shapiro & Stiglitz • Assume workers exert effort equal to – Zero – shirking – e>0 – not shirking – Think of effort as no. of units produced • If shirking, firm does not earn revenue but will still have to pay wage unless worker is caught – Need to eliminate shirking workers
Firm’s Policy
• Carrot and stick approach • Stick: Institute a monitoring policy – Catch shirker with probability p<1 – If caught sacked – get only unemployment benefit • Firm pays a wage high enough so that worker doesn’t want to shirk – W>b so that getting sacked hurts – This is insufficient
No Shirking Condition
• How much does firm have to pay to eliminate shirking • Worker has three options – Remain unemployed – collect benefits: b – Work and shirk – get wage :w • Risk loosing job with probability p – Work and not shirk – get wage : w • But exert effort: e • Net gain of w-e
• Note w>w -e >b – So in absence of threat of sack worker would shirk
nonshirk w
e
( 1
shirk p
)
w
pb w
e p
b w
e p
b
Equilibrium
• Note that the NSC implies a wage which will not equal the market clearing wage except by coincidence.
• So there will be unemployment in equilibrium • Why doesn’t wage fall?
– Because lower wage would lead to shirking – Even lower profits
• Post a bond?
– Commitment – Open to abuse – Pension schemes, salary scales, promotion • As the quality of the monitoring procedure improves – P rises – NSC shifts down – Wage down – Unemployment down
• As effort required rises – e up – NSC shifts up – Wage up – Unemployment up
W W 1 L D S NSC
Unemployment as a Discipline Device
• The basic model model is incomplete – Need to account for re-hires after being sacked • unemployment low – Easy to get job – being sacked is not a severe punishment • Need to pay even higher wage to avoid shirking – NSC curve slopes up – Asymptotic to Supply curve • Note if unemployment is zero wage is infinite
• Unemployment is a discipline device • Enables the policy of high wage plus monitoring to work • threat of sacking means something • So unemployment is both cause and effect – Effect: of high wage – Cause: of effective monitoring procedure
Search
• Unemployment is stock of those
waiting
for a job • Unemployment and unfilled vacancies can co-exist • matching unemployed workers and firms with vacancies takes time and money • Less socially damaging
Matching
• Central idea of search model is matching function – Another name for hiring function • For a worker to be hired requires that an unemployed worker meets a firm with a vacancy.
• Number of successful matches – Increases with U – Increases with V – h(U,V)
• Matching is not instantaneous • There will exist U and V in any instant • In a competitive labour market – No U – V infinite – Matching immediate
Beveridge Curve
• What happens to U when V increases?
• Focus on steady state i.e. equilibrium • Accounting rule for the flows in labour market – U: stock of unemployed – E: stock of employed – H: hiring or
matching
rate – F: firing rate
u
u
f fires
hires
*
E
h
*
U U
fE h
(
U
,
V
)
V BC U • Beveridge curve slopes down • As V rises, number of hires increase • For fixed firing rate, this reduces U • If f rose then curve shift to right – Any level of V now associated with higher U
Vacancies Curve
• How will the number of V issued be affected by U?
• Firms issue vacancies in order to maximise profits • Cost of issuing a vacancy: c – Competitive labour market c=0 – C>0 implies V filled job : p-w – One worker produces one unit: sell for p • Vacancy once issued will not automatically be filled – Worker and firm have to be matched – Crucial element • Probability of filling a vacancy =h/V • Net Profit from V: cV h ( U , V ) p V w V U • As U increases: – Matches (h) increase – Prob of filling Vacancy – Profitability of vacancies increases – Issue more vacancies – Curve gives firms response • Note importance of – Cost of vacancies – Matching not certain/instant • Curve will shift – down if c rises – Up if p-w rises • Put both curves together – Intersection gives eqm – Natural rate of unemployment – Eqm level of vacancies • Where would competitive labour market be? • What happens to equilibrium as parameters change? • c up: – Vac curve shifts (because c is in vac) – more costly to issue vacancies – So for any given U firms will isuues lower V – i.e. vac curve shifts down – Higher eqm U and lower V • Firing rate rises – Perhaps due to change in law -- or US vs EU – BC shifts (because f is in BC) • at any level of V, there are more fires, so stock of unemployed will be higher • i.e. BC shifts to right – New eqm with higher U and higher V – Why higher V? • Higher unemployment makes it easier to fill vacancies • So firms issue more vacancies • Shift along the V curve V Vac VAC : cV h ( U , V ) p V w BC : U fE h ( U , V ) BC U • New Matching technology – e.g. gov. scheme to help unemployed search for jobs – h increases for any given U and V – This affects both curve (h in both equations) – Vac Curve: • H up implies prob of filling a vacancy increases • Issue more vacancies at every level of U • Vac curve shifts up – BC: • H up implies flows out of unemployment increase at every V • U falls for all V • BC shifts left V Vac VAC : cV h ( U , V ) p V w BC : U fE h ( U , V ) BC U – New Eqm ist at B – U will fall • The rationale for these schemes – V may increase or decrease depend on size of shift in each curve. Why? • H up tends to increase V directly • But there indirect effect • U falling makes more difficult to fill V • So it depends which is greater • Crucial parameter is H/V. Is this rising or falling? • what determines w? • Intuitively expect w to increase with V and decrease with U • Min wage = b (unemployment benefits) • Max profits: p-b+cV/U – Hiring now saves cost of vacancy in future • Firm will not be able to pay just b – Workers will demand some premium – Firm will give premium because afraid of loosing profit – Because matching is not instantaneous • Assume they split the surplus – worker gets b – firm gets 1b – b reflects workers negotiating power • Net wage is equal to min (reservation wage) + share of surplus W=b+ b (p-b+cV/U) • W is increasing in V and decreasing in U – Note effect of c • We can see W on diagram by drawing line from origin V BC U Vac W A w b b p b V c U W B • For all models of Unemployment ask the question: – Why don’t unemployed workers offer to work for less? – W falls, labour market clears, U=0 • Answer:matching is not instantaneous – still may not physically meet an employer – Still have stock of people waiting for job i.e. U>0 – When they do they have incentive to take advantage and negotiate a higher wage • Firm does not want to turn them awayEquilibrium
Wages
Final Test