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Negishi-Solow Efficiency Wages, Unemployment Insurance and Dynamic Deterministic Indeterminacy

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  • Jean-Michel Grandmont

    (Crest)

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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Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2006-16.

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Length: 39
Date of creation: 2006
Date of revision:
Handle: RePEc:crs:wpaper:2006-16

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  1. 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.
  2. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
  3. 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).
  4. Drèze,Jacques, 1991. "Underemployment Equilibria," Cambridge Books, Cambridge University Press, number 9780521393188.
  5. Grandmont, Jean-michel, 1989. "Keynesian issues and economic theory," CEPREMAP Working Papers (Couverture Orange) 8907, CEPREMAP.
  6. 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.
  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. Tomoyuki Nakajima, 2003. "Unemployment and Indeterminacy," Working Papers 2003-24, Brown University, Department of Economics.
  9. 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.
  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. 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.
  13. 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.
  14. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
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