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Lecture 3 - Unemployment and the Labour Market Lecture#3...

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Unemployment and the labour market Paper 2: Macroeconomics Part IIA Unemployment and the Labour Market Lecture #3 Mauricio Prado [email protected] November 30, 2010
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Unemployment and the labour market Paper 2: Macroeconomics Part IIA Today’s outline Efficiency wages The model No-shirking condition
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Unemployment and the labour market Paper 2: Macroeconomics Part IIA Why don’t labour markets clear? 1. Why is there unemployment? 2. In the absence of minimum wages, why aren’t wages bid down sufficiently by job seekers so that everyone who wants a job finds one? 3. Can the neoclassical paradigm explain involuntary unemployment? An answer to these puzzles was famously proposed by Shapiro-Stiglitz in 1984: unemployment is driven by the information structure of employment.
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Unemployment and the labour market Paper 2: Macroeconomics Part IIA Shapiro-Stiglitz model Two basic observations are at the core of their analysis: 1. Unlike other forms of capital, humans can choose their level of effort. 2. It is costly for firms to determine how much effort workers are exerting.
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Unemployment and the labour market Paper 2: Macroeconomics Part IIA Sketch of the model 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 fired and instantaneously rehired. 3. There is therefore no penalty for not exerting effort (’shirking’). 4. To induce workers not to shirk, firms pay above-market wages. Therefore, job loss imposes a penalty. 5. Unemployment results since wages are above the natural equilibrium level. It creates its own penalty for shirking.
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