Unemployment and Indeterminacy

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractUsing an efficiency-wage model, we examine the relationship between indeterminacy and unemployment insurance. It is shown that the less unemployment insurance is, the more likely equilibrium is to be indeterminate. Equilibrium can be indeterminate even without externalities or increasing returns, which makes a sharp contrast to the recent literature on indeterminacy. Our result is based on the fact that the no-shirking condition with marginal utility of wealth kept constant is downward sloping when income insurance is not perfect.

Negishi–Solow efficiency wages, unemployment insurance and dynamic deterministic indeterminacy

“…One way out that has been much explored in the published literature has been to consider increasing returns through productive externalities with the unfortunate drawback, however, that their size had to be often too large to be empirically plausible in order to get local indeterminacy (Barinci and Cheron 2001; Benhabib and Farmer 1994; Cazzavillan et al 1998; Hintermaier 2003). The results obtained in this paper suggest that an alternative promising avenue in this respect would be to introduce unemployment, confirming other similar findings by Dufourt et al (2008), Nakajima (2006), Coimbra et al (2005) and Lloyd‐Braga and Modesto (2007).…”

“…It includes in particular Cobb‐Douglas production functions, a conclusion that seems to be in agreement with similar findings obtained after introducing unemployment in that sort of model (e.g. through unions, and imperfect unemployment insurance financed through labor income taxation as here (Dufourt et al 2008; Nakajima 2006; Coimbra et al 2005; Lloyd‐Braga and Modesto 2007)). Our analysis shows in particular that local indeterminacy is more likely to occur for low elasticities ɛ g (i.e.…”

“…I follow here the fundamental insight provided by Negishi (1979) and Solow (1979), who note that firms are constrained in their choice of a wage contract by the fact that workers' productivity (here their incentives to provide a required effort level) depends positively on the wage offered in the contract. I adopt here a specification that is directly inspired from the “shirking” formulation of Coimbra (1999), Alexopoulos (2004), Nakajima (2006) and Aloi and Lloyd‐Braga (2006), following the early contribution of Shapiro and Stiglitz (1984) (see also Danthine and Donaldson 1990; Uhlig and Xu 1996). At date t , under our maintained assumption , an employed worker under the wage contract ( w t , x t ) who provides the required effort level x tw = x t , gets the money wage w t , keeps the corresponding disposable wage income in cash, m tw = d t w t , in order to finance his or her consumption one period later, c t + 1, w = d t ω t p t / p t + 1 , as in , the corresponding utility level achieved being U ( d t ω t p t / p t + 1 ) − V ( x t ).…”

“…The aim of the present paper is, in the footsteps of Professor Negishi, to introduce efficiency wage arguments and involuntary unemployment in an otherwise standard finance constrained economy, as in Woodford (1986) and Grandmont et al (1998), and to study the consequences of unemployment insurance (financed by taxation of labor income) on the local dynamics near a stationary state. We use a specification that is directly inspired from the “shirking” formulation of Coimbra (1999), Alexopoulos (2004), Nakajima (2006) and Aloi and Lloyd‐Braga (2006), following the early contribution of Shapiro and Stiglitz (1984). See also Danthine and Donaldson (1990).…”

“… This paper was prepared for a special issue of the International Journal of Economic Theory (IJET) in honor of Professor Takashi Negishi. The idea of this work originates from my attending a lecture by T. Nakajima on his paper (2006) in Kyoto, on the occasion of the Second International Conference on Economic Theory, on 17–18 December, 2004, jointly organized by the 21st century COE programs, Keio University and Kyoto University.…”