Econ2102_Lecture4_handout

W norton company inc 4 8411 efficiency wages shapiro

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Unformatted text preview: Sources of Wage Rigidities •  Nominal Rigidity: Money illusion(?) •  Nominal/Real Rigidities: minimum wages, labour-market regulations/institutions •  Real Rigidity: “efficiency” wages Ld L FIGURE 7.6 L L Employment Macroeconomics, 2nd Ed Copyright © 2011 W. W. Norton & Company, Inc 4 8/4/11 Efficiency Wages •  •  •  •  Shapiro-Stiglitz Model One firm, many workers Imperfect Information Workers find effort costly –  Payoff to working = W – Ē –  Payoff to shirking = W •  Separation rate (normal risk of losing job): sbar •  Additional risk of being fired for shirking: qbar (where qbar<1 corresponds to imperfect monitoring) •  Results: –  If firms pay market-clearing wage W*=Ē, all workers will shirk –  Firm’s will choose to pay efficiency wage W*= (1+sbar/qbar)Ē •  Value of working = (W-Ē)/sbar •  Value of shirking = W/(sbar+qbar) •  Value of working ≥ Value of shirking => W ≥ Ē + (sbar/ qbar)Ē –  There will be no shirking in equilibrium, but there will be unemployment due to efficiency wage Different Kinds of Unemployment •  The natural rate of unemployment –  Rate that would prevail if the economy were in neither a boom nor a bust •  Cyclical unemployment –  The difference between the actual rate and the natural rate –  Associated with short-run fluctuations in output 5 8/4/11 •  The natural rate of unemployment includes two components: – Structural unemployment •  labor market failing to match up workers and firms in the market (due to wage rigidities such as efficiency wages) – Frictional unemployment •  workers being between jobs in the dynamic economy •  Two equations: employment change in unemployment 7.4 The “Bathtub” Model of Unemployment •...
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