Labour market economics problem solving Essay Example


The Shapiro-Stiglitz 1984 Model of unemployment

Unemployment refers to people who currently don’t have a job, have been job searching for one month and, or are ready to do any job. It also defines the temporary laid off workers and waiting to be employed back, the situation happens mostly during recession. Most firms will prefer to employ workers when the wages are low, while workers tend to join firms when the firms increase their wages. If q = 1 the employment rate will be determined by e= 1-u where u is the unemployment rate. u=25%/100 * 0.5 = 2, e = 1-2. The employment is less that 1 and that shows that there is high rate of involuntary unemployment

As the wage increases the probability of being caught shirking decrease and this decreases the unemployment rate. The no shirking wage is w*=v+b =$10 No shirking condition (NSC) happens when firm decides to pay higher wages to workers to ensure that workers stay in the firm. The wages are below 40%, the firms will to get rid of employees in order to sustain low wages. Involuntary unemployment will be observed.

The government is mandated to controlling the economics of a country and hence it can come through by effecting unemployment benefits. If the government decides to compensate the jobless, this will discourage the unemployed to look for jobs. Workers will prefer to stay at home and enjoy the free benefits that the government if offering. The rate of unemployment will go up and the labour efficiency will decrease. This goes against the non-shirking condition NSC model which maintains the employment rate. The resulting low employment will lead to most workers shirking.

Carl Shapiro and Joseph Stiglitz 1984 vol.74 pp 433-444, equilibrium unemployment as a worker displine device. The American review

hapiro & Stiglitz 2007 ph.D, Model of Efficiency Wages, Warsaw University.

Mark Thomas July 2014 the money watch,CBS