Extracting a revised labor supply theory from Becker's model of the household

Conflicting assumptions about labor supply behavior lie at the nexus of ideological and theoretical debates regarding the reality of involuntary unemployment, the efficacy of Keynesian macro-policy, and the appropriate nature of welfare policy. This can in part be attributed to the fact that orthodox theory is effectively predicated upon describing the behavior of individuals whose level of affluence enables them to voluntarily withhold their labor from the market. Ironically, a means of resolution appears if we extend Gary Becker's utility producing model of the household to recognize two latent behavioral concerns: (1) the ‘need’ of households for money income in order to produce utility, and (2) the presence of work activity in the home. The resulting generalized labor supply model extends Becker's analysis to explicitly encompass both the behavior of the affluent, and the behavior of the poor who need to work in order to sustain their existence.     

Labor market coordination and monetary equilibrium: W H. Hutt’s place in “Pre-Keynesian” macro

Conclusion As the search for microfoundations of macroeconomics has intensified over the last 25 years or so, macroeconomists have paid increasing attention to the economics of the labor market. Hutt’s work on the labor market could provide the microfoundations of a macroeconomics which emphasizes a process perspective and the importance of psychological, institutional, and political rigidities in how that process plays out. The work of the Austrians and the monetary disequilibrium theorists has articulated a consistent vision of how disequilibria in the money market spill over into nonmoney markets and cause real disturbances therein. Along with Hayek’s more general work on the informational properties of prices, Hutt’s work on the price coordination pro-cess in labor markets, can provide a more complete theory of the pricing process which implicitly and explicitly underlies the macroeconomics of those two schools of thought. Aside from his contributions to labor economics per se, Hutt’s work has implications for many fundamental questions in macroeconomics, as his life-long critique of Keynes illustrates. As modern macroeconomics continues its frustrating slide into complex, yet unrealistic, technique, perhaps Hutt’s work will finally begin to get its due when more macroeconomists begin to look for a more institutionally rich and realistic theory of the labor market to serve as their microfoundations.     

A Stochastic Monopsony Theory of the Business Cycle

Two distinct regimes, contractions and expansions, are generated in a model in which goods markets clear and all individuals are optimizing, strict wage and price takers, have fully rational expectations, and are heterogeneous in both preferences and resource endowments. Involuntary unemployment, asymmetric monetary policy effectiveness, and a changing relationship between real wages and employment over the business cycle are the result of optimizing behavior by monopsonistic, wage-setting, and price-taking firms faced with price uncertainty, an upward-sloped supply of employees, and efficiency wage behavior. Disequilibrium and involuntary unemployment can occur at the level of the individual firm's labor market.     

LABOR QUEUES AND INVOLUNTARY UNEMPLOYMENT

This paper outlines a job search model which emphasizes the placing of applications by job searchers and the firm's use of a queue of applicants as an inventory of labor. The paper analyzes the consequences of the assumption that firms hold queues of applicants both for the decisions of a single firm and for a market composed of several such firms. The aggregate results suggest that considering such labor market queuing helps explain wage rigidity and involuntary unemployment.     

Tournaments as a Worker Discipline Device

This article explores the macroeconomic implications of tournaments as a worker discipline device in the vein of shirking models. It is shown that, if the full exploitation of tournaments is feasible, there will be no involuntary unemployment. Thus, as far as the elimination of involuntary unemployment is concerned, tournaments can serve as a perfect substitute for the so-called "employment fee" or "bonding" scheme. An immediate corollary of this finding is that the involuntary nature of unemployment must ultimately rely upon impediments that hinder the full exploitation of tournaments.     

Behavioral economics and the economics of Keynes

The aim of this paper is two-fold: it first evaluates some of the psychological insights offered by Keynes in his economic theories, and secondly it weighs up these insights in the light of recent research in behavioral and experimental economics. We found that many of the psychological ideas set forth by Keynes in his economic works, especially in The General Theory, have a defensible behavioral foundation and fit broadly the actual behavior of economic agents in the real world as suggested by recent empirical evidence. As a consequence, we argue that Keynesian economics can benefit from this interaction, especially for issues related to judgment under uncertainty and building solid microfoundations for macroeconomics.     

INVOLUNTARY, EMPLOYMENT IN CONTRACTS WITH RISKY JOB SEARCH

The implication of partially insurable job search risk for incentive compatibility in a standard contracting framework are explored. When unemployment spells provoke job search, workers face risk in spell duration and reemployment wages. When search effort is not variable, contracts including unemployment insurance will yield involuntary employment. When search effort is diminished by UI benefits, firms shift some compensation back to wages, increasing the relative attractiveness of employment. The analysis begins with a theorem on incomplete insurance by Imai, Geanakoplos and Ito [1981] for which a simple proof and economic intuition are provided.     

Sectoral Mobility and Unemployment with Heterogeneous Moving Costs

A simple equilibrium model of sectoral reallocation is developed in order to study the impact of heterogeneous moving costs on unemployment. The model blends key elements of standard sectoral reallocation theory and the competitive search model. Heterogeneity in moving costs is introduced via mobile and immobile workers. The impact of mobile workers on the unemployment rates of mobile and immobile workers is of particular interest. The model shows that the share of mobile workers raises their unemployment rate. The model also shows that when labor mobility is driven by a sectoral level aggregate disturbance, mobile workers can have a non-monotonic, but globally negative impact on the unemployment rate of immobile workers. However, when labor mobility is driven by an idiosyncratic sector-worker match effect, the share of mobile workers raises the unemployment rate of immobile workers.     

LABOR MARKET SHARE CONTRACTS WHEN THE FIRM HAS TWO VARIABLE INPUTS

This paper extends Weitzman's analysis of share contracts. Firstly, a second variable input is introduced into a firm's production technology. Some share contracts give the firm an incentive to reduce worker compensation by manipulating the second variable input. This implies that contracts which possess this property cannot support the same long-run equilibrium as would be achieved with a wage contract. Secondly, a positively sloped labor supply curve is introduced. It is shown that while share contracts reduce involuntary unemployment, they may not reduce total unemployment vis-a-vis wage contracts. The paper identifies the factors which determine relative employment variability.     

TEACHING TOOLS: SHOULD WE TEACH MICROECONOMIC PRINCIPLES BEFORE MACROECONOMIC PRINCIPLES?

No consensus exists about the optimal sequencing of economics principles courses. We show that most top-ranked economics departments either do not specify an ordering or require microeconomics first, while most textbooks present macroeconomics before microeconomics. Using a national economic education database, we find that students learn more in principles of microeconomics after taking a course in macroeconomics. However, students do not learn more in principles of macroeconomics after taking a course in microeconomics. This implies that, ceteris paribus, principles of macroeconomics should be taught before principles of microeconomics for optimal student learning.     

EFFICIENCY WAGE MODELS OF UNEMPLOYMENT-ONE VIEW

Persistent wage rigidity and involuntary unemployment appear to be recurrent problems in most economies. What could be preventing the wage adjustment necessary to clear the labor market? Many recent papers claim to have found the answer in efficiency wage models. This paper surveys this literature and attempts to evaluate its accomplishments. It concludes that the efficiency wage models fail to explain wage rigidity or persistent involuntary unemployment.     

Poverty and the business cycle: A regional panel data analysis for Spain using alternative measures of unemployment

Conventional wisdom predicts that changes in the aggregate unemployment rate may significantly affect a country’s income distribution and, consequently, have a relevant impact on the evolution of its poverty rate. However, the relationship between labour macroeconomic indicators and poverty seems to have become weaker recently. Using panel data on unemployment and poverty for Spanish regions, we estimate a system GMM model to model this relationship using alternative measures of the unemployment rate. We also test the hypothesis of asymmetric effects of the business cycle on the share of poor individuals in the population. Our results show that unemployment has a positive impact on severe poverty, while inflation has a negative effect. We also highlight the extent to which results differ when alternative intra-household unemployment distribution-sensitive measures are considered. Regarding the existence of asymmetric business cycle effects on severe poverty, our results show that despite the fact that the Great Recession has had a strong and positive effect on severe poverty, the effects of expansions and recessions on poverty are not significantly different.     

Surviving Involuntary Unemployment Together: The Role of Resilience-Promoting Communication in Familial and Committed Relationships

Involuntary unemployment is an unfortunate circumstance not only for those without meaningful work, but also for families, family relationships, and committed long-term relationships. To explore the role that communication plays in helping family partners demonstrate resilience (i.e., competence and adaptation throughout the experience of a stressor), while dealing with involuntary unemployment, the current study surveyed a sample of 111 recently unemployed, relationally involved participants. The majority of these participants self-reported as married (40.6%) or indicated serious commitment (38.6%) with their relational partner. Communication strategies perceived as contributing to resilience with their partner were measured as Resilience-Promoting Communication (RPC). Bootstrapping mediation analysis determined that RPC dimensions emphasizing respect/harmony, partnership and tension release contributed to mediation of the relationship between feelings about job loss on relational satisfaction and commitment. In addition, respect/harmony moderated the relationship between both unemployment affect and commitment and satisfaction. Civility moderated the relationship between unemployment affect and satisfaction. Implications of these findings for theory and for families dealing with unemployment are discussed.     

Job security and unemployment in an efficiency-wage model

Job security and its effects on unemployment are controversial issues. I investigate the effects of job security in an efficiency-wage model of unemployment. Though efficiency-wage ideas have wide appeal and provide strong foundations of involuntary unemployment, not much has been written about the ramifications of job security in these scenarios. I show that job security creates wage and unemployment effects when efficiency-wage aspects are relevant, because employment guarantees shift the burden of workers' effort attraction to the wage mechanism. These effects are further enhanced when workers have some bargaining power. My results, therefore, suggest a trade-off between employment stability and employment: High employment security leads to smaller employment (or larger involuntary unemployment). I thank Ron Oaxaca and participants at the W.E. Upjohn Conference on Unemployment Insurance for useful comments.     

PROFIT-SHARES, BARGAINING, AND UNEMPLOYMENT

This paper considers the effect of profit sharing on unemployment in a simple model with an employment externality, overhead costs, and free entry. When wages are determined by Nash bargains and employment is set by firms, equilibrium unemployment is unambiguously reduced by mandated profit sharing. However, a bargained profit share may have the perverse effect of lowering both employment and compensation in general equilibrium. If overhead costs relevant to firms' entry decisions are excluded from the profit share accounting, then a mandated profit share may also have such a perverse effect. (JEL E24)     

Child support compliance during economic downturns

Prior studies have found little evidence of an association between unemployment and child support compliance. However, few such studies used sample periods including a recession as severe as the one that occurred in 2007–2009 or a period following the Congressional mandate requiring states to adopt immediate wage withholding for all child support orders established after January 1992. While virtually assuring compliance by steadily employed nonresident fathers, this requirement imposes hardships on unemployed nonresident fathers, especially during recessions, because modifying child support orders is costly, difficult, and uncertain. Using the CPS-CSS, this study provides reduced form estimates of the association between unemployment and child support compliance over a period (1993–2011) with severe business cycle fluctuations and immediate wage withholding in full effect. Despite controls for fixed effects (state and year) and a state-specific linear time trend, we found that local unemployment rates were associated with decreases in some measures of compliance in our full sample. In models using non-pass through child support payments, which minimized measurement error due to misreporting, there was a much more consistent relationship between unemployment and compliance. Further, after restricting the sample to cash assistance recipients to avoid bias due to selection into the child support enforcement system, we found that local unemployment rates were consistently, strongly, and negatively associated with compliance. Given the volatility in unemployment rates during recent recessions and in the Great Recession in particular, these findings suggest the potential for a large-scale impact of macro-economic factors on the consistent provisions of child support.     

Regional Economic Performance and Net Migration Rates in Russia, 1993–20021

Soviet legacies and uneven economic distress make post‐Soviet Russia an especially interesting case in which to assess the effects of economic performance on regional net migration rates. Random effects models of net regional migration in 77 Russian regions from 1993 to 2002 indicate that mean wages and unemployment levels have substantial and predictable effects. These effects have several dynamic aspects: changes in mean wages (but not changes in unemployment) exert effects independently of wage and unemployment levels, the effect of unemployment decreases over time, and the effect of wage levels appears to increase. Overall, the results suggest a tendency toward regional equilibrium with respect to employment following the initial shock of Soviet collapse and market reforms, but continuing disequilibrium with respect to wages.     

UNEMPLOYMENT AND FINANCIAL CONSTRAINTS FACED BY SMALL FIRMS

A distinguishing feature of small firms is that most small business owners work for themselves and only employ relatives and friends. We examine conditions under which this labor market practice is an economic outcome and consider the link between this outcome and unemployment. The model is motivated by empirical evidence that suggests that small firms are subject to financial constraints that are supported by information asymmetries. I show that, in a constrained equilibrium, sole proprietorship and unemployment arise from an information imperfection in the credit market that makes infeasible the consummation of mutually beneficial contracts in the labor market.     

Differential labeling of mental illness by social status: a new look at an old problem

Whether the higher rates of mental hospitalization and involuntary treatment for marginal social groups are due to differential labeling or simply to the occurrence of higher rates of disorder in these groups remains unresolved. I reexamine this issue with data from the National Comorbidity Survey (N = 5,877) that allow comparisons between disturbed individuals living in the community untreated and disturbed persons who have been hospitalized or seen a professional for their mental health problems under pressure or voluntarily. Contrary to labeling theory, members of lower status groups are not consistently overrepresented among those who have been hospitalized or seen a professional against their will. Consistent with self-labeling theory, persons with greater education and those not in poverty are disproportionately present among individuals who sought treatment by choice. Additional analyses show that factors that predict service utilization are important determinants of mental health service use but do not account systematically for status disparities in hospital or outpatient treatment, especially disparities by poverty status. Although I do not confirm a central tenet of labeling theory here, the negative consequences of labeling and stigma continue to be well-supported in the literature.     

TEACHING TOOLS: SIMULATING MONEY SUPPLY CREATION IN CLASS

Students in introductory economics or intermediate macroeconomics can learn and experience the process of creating money through an interactive simulation in which students play the roles of bankers, loan customers, and business firms. The simple version of this simulation is easy to set up, though many instructors will find the more structured version worth the additional setup cost. During the structured simulation, students encounter other macroeconomic concepts such as the marginal efficiency of investment curve, and broad versus narrow money. This simulation offers some experiential learning and adds variety to a macroeconomics course. (JEL A22)