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Labor Market Equilibrium in General Equilibrium Model with Involuntary Unemployment Arising from Asymmetric Information from Shapiro and Stiglitz (1984), see Appendix.
Source publication
Sectors with increasing returns to scale have been shown to amplify business cycles exhibiting more volatility than others
[13]. Our hypothesis is that this volatility could be a cause of the “jobless recovery” suggesting policies for employment
generation. To test this hypothesis we introduce a general equilibrium model with involuntary unemployme...
Contexts in source publication
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... this end we postulate a 'produced' labor supply curve that is an increasing function of wages (see Figure 2 below). It is not the purpose of this article to provide an explicit derivation of the 'produced labor' supply curve; instead, we use as a model for this 'produced labor' supply the non-shirking condition that arises from the efficiency wage theory of Shapiro and Stiglitz [32] (see Figure 1), the connection between the two is developed below and in the Appendix, see Figure 1. The 'produced' labor supply function is taken as exogenously given by work- ers (hence it is 'involuntary'). ...
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... this end we postulate a 'produced' labor supply curve that is an increasing function of wages (see Figure 2 below). It is not the purpose of this article to provide an explicit derivation of the 'produced labor' supply curve; instead, we use as a model for this 'produced labor' supply the non-shirking condition that arises from the efficiency wage theory of Shapiro and Stiglitz [32] (see Figure 1), the connection between the two is developed below and in the Appendix, see Figure 1. The 'produced' labor supply function is taken as exogenously given by work- ers (hence it is 'involuntary'). ...
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... Unemployment paper, the non-shirking condition (NSC) as illustrated in Figure 1 and derived in the Appendix 15 acts as the equivalent to our 'produced' labor supply function. Shapiro-Stiglitz observe that in the environment characterized by imperfect in- formation (in their case firms are unable to tell the actual effort level of their workers), firms are forced to pay a higher than market clearing wage in order to keep workers from shirking, hence the non-shirking condition and the resulting involuntary unemployment. ...
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... market clears) Notice however that labor market clears in the sense that 'produced' labor supply is equal to labor demand. But since 'produced' labor supply is given by L s = L s (w, p B ) and is different from the potential labor supply, N , the labor market is characterized by the existence of involuntary unemployment, since N > L * , as shown in Figure 1. Workers without a job are willing to work at a wage below w * but will not be hired because below the clearing wage, the L s produced by these workers is below firm's requirement since workers are not as educated or not as healthy to do the needed job. ...
Citations
The extent to which probability and duration of unemployment affect the black–white wage differentials is examined in this paper. The paper simultaneously incorporates in the wage equation the multiple sample selection bias that occurs as a result of individuals’ propensity to be in the labor force, and the firm’s hiring decisions. The results reveal a substantial contribution of the duration of unemployment variable to the black–white wage differential, but a small portion of the differential is explained by the probability of unemployment. The results also indicate a sizeable difference between the contribution of the duration of unemployment variable to the male’s wage differentials (26%) and to the female’s (35%). The study finds that an individual’s labor force decision as well as a firm’s hiring decision are important in the wage determination process and that failure to account for the sample selectivity bias due to these two decisions will result in either underestimating or overestimating the wage differentials between black and white workers. At the macro level, the results seem to suggest that promotion of racial wage equality should be associated with policies that will minimize blacks’ incidence of unemployment and duration of unemployment spells.
Many years of experimental observations have raised questions about the rationality of economic agents- for example, in the Allais Paradox or the Equity Premium Puzzle. The problem is a narrow notion of rationality that fails to account how we respond to fear. In this article we extend the notion of rationality with new axioms of choice under uncertainty and the decision criteria they imply [9] [10]. In the absence of catastrophes, the old and the new approach coincide, and both lead to standard expected utility. A sharp difference emerges when facing catastrophes. We found that one classic axiom of choice postulates that rational behavior should be ‘insensitive’to rare events with major consequences (Theorem 2), which does not seem right. This by itself can lead to paradoxes. We replace this with an axiom that allows extreme responses to extreme events. The implied decision criteria are a combination of expected utility with extremal responses. They offer a new understanding of rationality that seems consistent with previously unexplained observations, including the Equity Premium Puzzle, ‘jump diffusion’ processes and ‘heavy tails’, and agrees also with Gerard’s Debreu’s 1953 formulation of market behavior
