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Lecture Note: E ciency wages, the Shapiro-Stiglitz Model David H. Autor MIT and NBER November 1, 2003 1
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1 Why don’t labor markets clear? Why is there unemployment? In the absence of minimum wages, why aren’t wages bid down su ciently by job seekers so that everyone who wants a job f nds one? Can the neoclassical paradigm explain involunary employment? An answer to these puzzles was famously proposed by Shapiro-Stiglitz in 1984: Unemploy- ment is driven by the information structure of employment. Two basic observations undergird their analysis: 1. Unlike other forms of capital, humans can choose their level of e f ort. 2. It is costly for f rms to determine how much e f ort workers are exerting. 1.1 Sketch 1. Consider a situation where all workers can receive the market wage and there is no unemployment. 2. In this case, the worse thing that can happen to a worker is that she will be f red and instantaneously rehired. 3. There is therefore no penalty for not exerting e f ort (‘shirking’). 4. To induce workers not to shirk, f rms pay above-market wages. Therefore, job loss imposes apena lty . 5. But if one f rm pays above-market wages, then presumably they all will. 6. In this case, the incentive not to shirk disappears. But unemployment results since wages are above the natural equilibrium level.
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7. Hence, the model implies that unemployment and monitoring are substitutes. 8. Consequently, wages serve two functions: allocating labor and providing incentives for employee e f ort conditional on employment. As is usually the case when one instrument is used to solve two problems, this is likely to lead to ine cient outcomes. 1.2 Basic setup N identical, risk neutral workers. Instantaneous utility is a function of wages and e f ort ‘normalized’ as: u ( w,e )= w e. e is either 0 or a constant e> 0 (binary, not continuous). Unemployed workers receive w 0 and e =0 . b is the exogenous separation rate per unit time. r is the intertemporal discount rate. Theworkersobject ivefunct ionisthere fore max e E Z 0 u ( w ( t ) ,e ( t )) exp( rt ) ∂t ¸ The workers choice at any point in time is to exert e f ort or not. That’s it. The odds of getting caught if shirking are q. If f red ,theworkerentersunemp loyment ,wa itsforanewjob .
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1.3 Asset equations Consider a short, discrete time interval: [0 ,t ] . The asset value of employment is V e = wt +(1 rt )[ btV u +(1 bt ) V e ] . (1) Notice that we are for now taking V u as given. The wt term is the f ow of wages, and the second expression is the discounted value of future outcomes, bearing in mind that
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This note was uploaded on 01/12/2011 for the course ECO 010023 taught by Professor Mrraggillpol during the Fall '09 term at Paris Tech.

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MITpdf - Lecture Note: Eciency wages, the Shapiro-Stiglitz...

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