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.     

Did Henry Ford mean to pay efficiency wages?

In the past two decades economists have developed efficiency wage theories, which suggest a link between wage rates and worker productivity, while attempting to explain the existence of involuntary unemployment in equilibrium labor markets. Henry Ford's 1914 announcement of the five-dollar day, an overnight doubling of wage rates, is regularly used as the textbook application of efficiency wage theories put into practice. While previous research demonstrates that the effects of the five-dollar day were largely consistent with those predicted by efficiency wage theories, Ford's wage policy was principally motivated by the fallacious wage-aggregate demand link expressed by the so-called“high-wage doctrine”-a belief that many economists claim significantly contributed to the unemployment problem of the 1930s. In addition to exploring Ford's high-wage motives, I discuss the role Ford's wage statements and policies played in the acceptance and implementation of high-wage public policies during the Great Depression. I appreciate helpful comments from Ranjit Dighe, George Selgin, and participants at the Economic and Business Historical Society meetings.     

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.     

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.     

From wage rigidity to labour market institution rigidity: A turning-point in explaining unemployment?

In this paper we offer a critical discussion about the concept of labour market rigidity in the light of recent theoretical approaches that have aimed to provide sound micro-foundations to the presence of unemployment in market economies. We point out that the concept of labour market rigidity usually referred to in such theories has changed over time, involving in succession the rigidity of wages, contracts and labour market institutions. We also appraise the factors that lead labour market institutions rigidity, stressed by the search literature, to challenge the more widespread explanation of unemployment grounded on wage rigidity. Moreover, we analyse some theoretical and empirical issues that cast doubt on the ability to deal with unemployment, disentangling the role of institutional rigidities from that of wage stickiness.     

Spatial variations in U.S. unemployment

Interstate unemployment rate differentials are large, tend to persist, and have not converged in recent times. The interstate differential in the natural rate of unemployment seems partially explained by several factors related to labor costs, including wage rates and such institutional factors as unionization, welfare, and probably tax policy. Differential welfare incidence may explain the black-white unemployment differential. Variations in intertemporal fluctuations in unemployment across states seem related to institutionalized wage rigidity caused by such factors as unions and welfare. For still unexplained reasons, unemployment tends to be higher in the West, deep South, and the industrial Midwest.     

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.     

EFFICIENCY WAGE MODELS OF UNEMPLOYMENT: A SECOND VIEW

Efficiency wage models, in which firms find it profitable to pay wages above workers' reservation wages, provide a promising explanation for unemployment and interindustry wage differentials. One criticism of such models is they imply firms should sell jobs by requiring up-front bonds from new workers. However, only some efficiency wage models imply this. Moreover, firms might not require bonds for many reasons. We show that moral hazard and adverse selection models together explain many labor market phenomena. The efficiency wage model conforms well to empirical finding, but certain anomalies suggest the need to consider rent-sharing models.     

UNCERTAINTY AND STICKY-DOWNWARD BUT UPWARD-MOBILE WAGES

The usual search models of unemployment hold that firms do not offer wage cuts to employees in time of slack demand because the employees have alternatives open to them at wages higher than the reduced wage that would be required to maintain full employment. This paper extends these models by considering employees as choosing in conditions of uncertainty and showing that refusal to accept a wage cut is often rational in the absence of a higher alternative wage. Additional implications are derived for union behavior and simultaneous inflation and unemployment.     

SELF‐EMPLOYMENT,EFFICIENCY WAGE,AND PUBLIC POLICIES

Empirical evidence suggests that unemployed workers are much more likely to become self‐employed than wage‐employed workers. Also, higher unemployment benefits significantly reduce the rate of self‐employment. This article develops a model of self‐employment which incorporates transitions between unemployment and self‐employment. It integrates two strands of theoretical literature—models of occupational choice and the efficiency wage models. In this model, a higher unemployment benefit reduces the self‐employment rate and the transition rate of unemployed workers to self‐employment, which is consistent with empirical evidence. (JEL J23, J58, J64)     

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.     

LABOR MARKET DYNAMICS WITH SEARCH FRICTIONS AND FAIR WAGE CONSIDERATIONS

Fairness considerations in wage setting can improve the ability of the Diamond‐Mortensen‐Pissarides search and matching model to account for U.S. labor market dynamics. Firms' production is influenced by workers' effort input, which depends on whether workers consider the employment relation as fair. A typical worker's effort is determined in a comparison of individual current wage with wage norms, including the outside option, the individual past wage, and the wage level in the steady state. The fairness considerations in the search framework give rise to endogenous real wage rigidity, and realistic volatilities of unemployment, vacancies, and labor market tightness. (JEL E24, E32, J64)     

A THEORY OF DOWNWARD-RIGID WAGES AND CYCLICAL UNEMPLOYMENT

The theory presented below provides a rationale for downward wage rigidity and consequent cyclical unemployment by modifying the neoclassical assumption of behavioral independence. Such a modification permits an examination of important nonmarket relationships holding between the individual's wage and the wages paid to other people and between perceived equity in wages received and worker productivity—both linkages widely recognized by personnel managers but little explored by economists. The resulting model predicts a pattern of behavior that is consistent with the available evidence on the actual operation of labor markets.     

Economic Theories of Low-Wage Work

This article examines economic theories of the low-wage labor market to increase understanding of economic inequality and poverty in the United States, particularly related to the labor market. On the one hand, neoclassical, labor monopsony, and Harris-Todaro models explain how minimum wage policies are related to supply and demand of labor, human capital, employment, and unemployment. On the other hand, the efficiency wage model, the dual labor market theory, and technology development and globalization account for the causes of the wage differentials. This article includes a conceptual map that illustrates the interrelationships between these economic theories of low-wage work.     

A COMPETITIVE MODEL OF WORKER REPLACEMENT AND WAGE RIGIDITY

We adapt the models of Menzio and Moen (2010) and Snell and Thomas (2010) to consider a labor market in which firms can commit to wage contracts but cannot commit not to replace incumbent workers. Workers are risk averse, so that there exists an incentive for firms to smooth wages. Real wages respond in a highly nonlinear manner to shocks, exhibiting downward rigidity, and magnifying the response of unemployment to negative shocks. We also consider layoffs and show that for a range of shocks labor hoarding occurs while wages are cut. We argue these features are consistent with recent evidence. (JEL E32, J41)     

Underemployment and depression: longitudinal relationships

We conceptualize employment status not as a dichotomy of working versus not working but as a continuum ranging from adequate employment to inadequate employment (involuntary part-time or low wage) to unemployment. Will shifts from adequate to inadequate employment increase depression as do shifts from employment to unemployment, and to what extent does prior depression select workers into such adverse employment change? We analyze panel data from the National Longitudinal Survey of Youth for the years 1992-1994 for the 5,113 respondents who were adequately employed in 1992. Controlling for prior depression, both types of adverse employment change resulted in similar, significant increases in depression. These direct effects persisted despite inclusion of such potential mediators as changes in income, job satisfaction, and marital status. Marital status buffered the depressive effect of both types of adverse change, but education and job dissatisfaction amplified the effect of unemployment on depression. Prior depression did not predict higher risk of becoming inadequately employed but did predict increased risk of unemployment, particularly for those with less education. These results confirm that both unemployment and inadequate employment affect mental health, and they invite greater efforts to monitor the extent and impact of underemployment.     

Birth weight and mothers' adverse employment change

Low birth weight has been linked at the aggregate level to unemployment rates and at the individual level to subjective distress. We hypothesize that maternal underemployment, including unemployment, involuntary part-time work, and low wage work predicts decreased birth weight. The relationship of birth weight to maternal employment changes during pregnancy was studied prospectively in 1,165 singleton first births in the National Longitudinal Survey of Youth data set. Controlling for other significant risk factors, women who shifted from adequate employment to underemployment had significantly lighter babies. Plausible mediators of this relationship were explored, including prenatal health care, gestational age, and mother's weight gain, with results varying by type of underemployment. Two interactions also suggested that underemployment reduced the beneficial effect of mother's weight gain on birth weight. These findings were partially replicated for low birth weight (< 2,500 grams), indicating the medical significance of the effect.     

The minimum wage can harm workers by reducing unemployment

Economists may disagree over how much raising the minimum wage increases unemployment, though few argue that the unemployment effect is zero. According to the standard model, the less the unemployment caused by a minimum wage increase, the less the harm (or greater the good) that results. But by recognizing that minimum wage workers receive fringe benefits, I show that increasing the minimum wage may not cause any unemployment and harms workers because it doesn 't. Furthermore, when there is lumpiness in providing fringe benefits, a minimum wage increase may harm workers by     

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.     

BEYOND KEYNESIANISM AND MONETARISM

Though there is consensus among economists about microeconomic theory, neither the Keynesian nor the Monetarist theory of macroeconomics has attracted a consensus, presumably because neither is compelling enough to persuade the skeptical. A new approach to the subject that combines insights from each of the familiar schools with considerations that both schools have overlooked is accordingly offered here. This argument accepts the evidence that involuntary unemployment and depressions sometimes occur and thus rejects the finding of the new classical or equilibrium macroeconomics, that markets always clear and that all individuals and firms are in equilibrium. It also rejects the Keynesian assumption of wages or prices arbitrarily fixed at disequilibrium levels, and insists that any adequate theory must show what interests are served by the existence of involuntary unemployment. The theory offered here shows that an institutional or organizational arrangement common in all societies which have experienced widespread unemployment and deep recessions entails that many firms and individuals will be in disequilibrium. This disequilibrium becomes more severe when there is unexpected deflation or disinflation. The disequilibrium is of precisely the type commonplace in recessions and entails involuntary unemployment. The theory also shows how groups of individuals and firms can gain from practices that entail involuntary unemployment and underutilization of resources for others.