Download presentation

Presentation is loading. Please wait.

Published byJaheim Bruton Modified over 4 years ago

1
Lecture II: Constructing a theory of equilibrium unemployment Microeconomic foundations of the wage curve

2
How are wages set? Wages can be thought of as the sum of three terms: –A compensation for the disutility of labor –An outside option which determines what the worker would get outsidr the employment relationship (alternative wage = OC of labor) –A rent which tells us how much he can grab beyond that

3
When is unemployment involuntary? If the employed are better-off than the unemployed, the latter would prefer to be employed Therefore, involuntary unemployment rent = 0 Does that mean we are at the Walrasian equilibrium?

4
What is a Walrasian equilibrium? WE holds if outside option = flow of utility corresponding to a zero wage But Unemployment Benefits and Welfare Minima can raise OO above that level Unemployment is then voluntary but above the walrasian level

5
Do we need rents in the model? Assume no rent For h(u) to be downward sloping, unemployment must negatively affect the outside option This cannot be true if the employed are no better-off than the unemployed We thus have a flat h(u) curve and are back to the wage floor model

6
Three classes of models: Collective bargaining models rents come from the union’s monopoly on jobs Individual barganing models rents come from turnover costs Efficiency wage models rents come from informational issues + incomplete contracting

7
Collective bargaining models There are three of them: –Monopoly Union –Efficient Bargaining –Right-to-Manage

8
Monopoly Union

9
What is going on? The union maximizes the total expected income of members It takes the LD curve as given Wages = markup on OC of labor Markup inversely related to elasticity OC of labor reflects job finding prospects goes down with u If UB indexed on wages, natural rate only depends on replacement ratio and elasticity

10
Membership effects Note that union membership N has no impact on the outcome We can get membershif effects by introducing nonlinearities Example: unions maximize the median members’ expected income His employment probability is nonlinear in L/N

11
Getting membership effects:

12
Comments: If elasticity of φ falls, then lower membership => higher wages and more unemployment If membership depends on past employment => persistence mechanism Membership rules matter (encompassing unions vs. Guilds)

13
Efficient Bargaining

14
Comments: Employment is determined at the privately efficient level from the match’s point of view Absent institutional rigidities, employment would be at its walrasian level Wage bargaining only affects the way the surplus is split wages are a pure transfer, the true allocative price is the OCL

15
Right-to-manage:

16
Comments Generalization of monopoly union model Generates suboptimal employment The rent now depends on the workers’ bargaining power in addition to the elasticity of labor demand

17
Individual bargaining In collective models, the firms cannot hire workers competitively at the margin Nor can other firms in the same sector do so Under individual bargaining, the firm could drive the surplus of the match to zero by simply hiring more people Turnover costs are needed to create a positive surplus

18
The dynamic insider/outsider model A representative firm can hire as much as it wants from the pool of unemployed Once hired, people negotiate their wage The firms incurs a cost F upon separation due to disagreement

19
The plumbing:

20
Wage formation

21
The hold-up problem: The intertemporal rent is fixed It goes up with the turnover cost It goes up with the worker’s bargaining power The turnover cost is a specific investment which can be appropriated by the incumbent worker F could equivalently be a hiring cost

22
Deriving the steady state wage schedule

23
Wage pressure goes up with Turnover costs Insider bargaining power Unemployment benefits Turnover Real interest rates

24
The shirking model Employee effort e imperfectly observable (flow probability q) Penalty upon shirking limited to dismissal In equilibrium, employees must be paid rents Otherwise, no penalty from dismissal: a job is found instantaneously Thus, unemployment duration acts as a discipline device

25
Same plumbing as the insider model

26
Deterring shirking:

27
Comments: The model is equivalent to I-O model Just replace rent by e/q Rent now depends on effort levels and on the monitoring probability Effects of s and r are the same

Similar presentations

OK

Lecture 1: Constructing a theory of equilibrium unemployment I. A macroeconomic framework.

Lecture 1: Constructing a theory of equilibrium unemployment I. A macroeconomic framework.

© 2018 SlidePlayer.com Inc.

All rights reserved.

To make this website work, we log user data and share it with processors. To use this website, you must agree to our Privacy Policy, including cookie policy.

Ads by Google

Knowledge based view ppt on ipad Ppt on south african culture and food Ppt on group development in education Free ppt on obesity Download ppt on reduce reuse recycle Ppt on cross site scripting owasp Ppt on panel discussion moderator Ppt on ufo and aliens facts Ppt on credit policy and procedure Ppt on obesity diet