A dynamic programming model for effect of worker’s type on wage arrears

We analyze how wage arrears are affected by the worker’s type (in this paper, the worker’s type means the worker’s attitude to wage arrears). Wage arrears cause workers’ negative emotion which may lead to serious social problem and the government may intervene. In this paper, we model the process of wage arrears as a Markov decision process in which the firm is the decision maker. We develop an optimal solution approach under the assumption that the worker’s negative emotion threshold (The worker’s negative emotion increases monotonically with increasing back pay. Once the cumulative back pay exceeds a particular value, the worker will take legal actions and the government will intervene. We define the particular value as the worker’s negative emotion threshold.) is normally distributed and provide insights into how wage arrears vary with the worker’s type and the government intervention. We propose the optimal government intervention which stops wage arrears and does not disturb the normal order of the market economy. We show that the intervention depends on the worker’s type and the results imply that the government intervention should be adjusted dynamically according to different regions, industrial sectors and time periods.