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Unemployment and Wage Rigidity When Labor Supply Is a Household Decision

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Author Info

  • Basu, Kaushik

    (Cornell U)

  • Genicot, Garance

    (U of California, Irvine)

  • Stiglitz, Joseph E.

    (Brookings Institution and Stanford U)

Abstract

If people's labor-supply decisions are taken at the level of the household, it is natural to expect aggregate demand and unemployment to influence the supply curve of labor. An increase in unemployment could prompt households to send more workers out in search of work to insure against the risk of the primary worker getting unemployed (the 'added worker effect'). But it could also discourage people from wasting energy searching for work (the 'discouragement effect'). While these effects have been studied empirically, their theoretical bases remain largely unexplored. The present paper formally models household labor supply decisions and establishes sufficient conditions for the domination of one effect over the other. A number of surprising results are established, such as the possibility of multiple equilibria in the labor market and how the announcement of a minimum wage policy can result in an overall lowering of wages and also give rise to an equilibrium which displays, simultaneously, excess demand and excess supply of labor. The model shows how the empirical literature may have a bias in overestimating the strength of the discouragement effect. It also provides a framework for analyzing the effects of minimum wage policy and the provision of unemployment benefits. It is argued that certain kinds of unemployment benefits can be justified on grounds of efficiency.

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Bibliographic Info

Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 00-10.

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Date of creation: Sep 2000
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Handle: RePEc:ecl:corcae:00-10

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References

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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. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-42, March.
  3. Basu, Kaushik, 1999. "The intriguing relation between adult minimum wage and child labor," Policy Research Working Paper Series 2173, The World Bank.
  4. Stiglitz, Joseph E, 1974. "Alternative Theories of Wage Determination and Unemployment in LDC'S: The Labor Turnover Model," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 194-227, May.
  5. Schlicht, Ekkehart, 1978. "Labour Turnover, Wage Structure, and Natural Unemployment," Munich Reprints in Economics 1255, University of Munich, Department of Economics.
  6. Layard, R & Barton, M & Zabalza, A, 1980. "Married Women's Participation and Hours," Economica, London School of Economics and Political Science, vol. 47(185), pages 51-72, February.
  7. Fleisher, Belton M & Rhodes, George, 1976. "Unemployment and the Labor Force Participation of Married Men and Women: A Simultaneous Model," The Review of Economics and Statistics, MIT Press, vol. 58(4), pages 398-406, November.
  8. Kaushik Basu, 1999. "Child Labor: Cause, Consequence, and Cure, with Remarks on International Labor Standards," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1083-1119, September.
  9. Mincer, Jacob, 1976. "Unemployment Effects of Minimum Wages," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S87-104, August.
  10. Orley Ashenfelter, 1977. "Unemployment as Disequilibrium in a Model of Aggregate Labor Supply," Working Papers 484, Princeton University, Department of Economics, Industrial Relations Section..
  11. Maloney, Tim, 1991. "Unobserved Variables and the Elusive Added Worker Effect," Economica, London School of Economics and Political Science, vol. 58(230), pages 173-87, May.
  12. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  13. Lundberg, Shelly, 1985. "The Added Worker Effect," Journal of Labor Economics, University of Chicago Press, vol. 3(1), pages 11-37, January.
  14. Basu, Kaushik & Van, Pham Hoang, 1998. "The Economics of Child Labor," American Economic Review, American Economic Association, vol. 88(3), pages 412-27, June.
  15. Tim Maloney, 1987. "Employment Constraints and the Labor Supply of Married Women: A Reexamination of the Added Worker Effect," Journal of Human Resources, University of Wisconsin Press, vol. 22(1), pages 51-61.
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Cited by:
  1. Basu, Kaushik, 2005. "Labor Laws and Labor Welfare in the Context of the Indian Experience," Working Papers 05-17, Cornell University, Center for Analytic Economics.
  2. Bhalotra, Sonia R. & Umana-Aponte, Marcela, 2010. "The Dynamics of Women's Labour Supply in Developing Countries," IZA Discussion Papers 4879, Institute for the Study of Labor (IZA).
  3. Basu, Kaushik, 2006. "Teacher Truancy in India: The Role of Culture, Norms and Economic Incentives," Working Papers 06-03, Cornell University, Center for Analytic Economics.
  4. Yinggang ZHOU, 2004. "Rational Panics, Absorbing Regime Switching And Stock Market," Econometric Society 2004 Far Eastern Meetings 681, Econometric Society.
  5. Dengta CHEN & Yinggang ZHOU, 2004. "Rational Panics, Absorbing Regime Switching and Stock Market," Econometric Society 2004 Far Eastern Meetings 680, Econometric Society.

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