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

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  • Jean-Michel Grandmont

Abstract

This paper introduces efficiency wages designed to provide workers withincentives to make appropriate effort levels, and involuntary unemployment,along the pioneering lines of Negishi (1979), Solow (1979), Shapiro andStiglitz (1984), in a dynamic model involving heterogeneous agents and financialconstraints as in Woodford (1986) and Grandmont, Pintus and deVilder (GPV, 1998). Effort varies continuously while there is unemploymentinsurance funded out of taxation of labour incomes. Increasing unemploymentinsurance is beneficial to employment along the deterministic stationarystate, and can even in some cases lead to a Pareto welfare improvementfor all agents, through general equilibrium effects, by generating higher individualreal labour incomes, hence larger consumptions of employed andunemployed workers, and thus a higher production. On the other hand, thelocal (in)determinacy properties of the stationary state are opposite to thoseobtained in the competitive specification of the model (GPV, 1998) : localdeterminacy (indeterminacy) occurs for elasticities of capital-efficient laboursubstitution lower (larger) than a quite small bound. Increasing unemploymentinsurance is more likely to lead to local indeterminacy and thus togenerate dynamic inefficiencies due to the corresponding expectations coordinationfailures.

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Article provided by The International Society for Economic Theory in its journal International Journal of Economic Theory.

Volume (Year): 4 (2008)
Issue (Month): 2 ()
Pages: 247-272

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Handle: RePEc:bla:ijethy:v:4:y:2008:i:2:p:247-272

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  1. GRANDMONT, Jean-Michel & PINTUS, Patrick & de VILDER, Robin, 1997. "Capital-labor substitution and competitive nonlinear endogenous business cycles," CORE Discussion Papers 1997087, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Cazzavillan, Guido & Lloyd-Braga, Teresa & Pintus, Patrick, 1996. "Multiple steady states and endogenous fluctuations with increasing returns to scale in production," CEPREMAP Working Papers (Couverture Orange) 9618, CEPREMAP.
  3. Drèze,Jacques, 1991. "Underemployment Equilibria," Cambridge Books, Cambridge University Press, number 9780521393188.
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  6. Grandmont, Jean-michel, 1989. "Keynesian issues and economic theory," CEPREMAP Working Papers (Couverture Orange) 8907, CEPREMAP.
  7. Marta Aloi & Teresa Lloyd-Braga, 2010. "National labor markets, international factor mobility and macroeconomic instability," Economic Theory, Springer, vol. 43(3), pages 431-456, June.
  8. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  9. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  10. Alexopoulos, Michelle, 2004. "Unemployment and the business cycle," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 277-298, March.
  11. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
  12. Dufourt, Frédéric & Lloyd-Braga, Teresa & Modesto, Leonor, 2008. "Indeterminacy, Bifurcations, And Unemployment Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S1), pages 75-89, April.
  13. Barinci, Jean-Paul & Cheron, Arnaud, 2001. "Sunspots and the Business Cycle in a Finance Constrained Economy," Journal of Economic Theory, Elsevier, vol. 97(1), pages 30-49, March.
  14. Hintermaier, Thomas, 2003. "On the minimum degree of returns to scale in sunspot models of the business cycle," Journal of Economic Theory, Elsevier, vol. 110(2), pages 400-409, June.
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