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

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  • Jean-Michel Grandmont

    ()
    (CREST, Malakoff Cédex, France)

Abstract

This paper introduces efficiency wages designed to provide workers with incentives to make appropriate effort levels, and involuntary unemployment, along the pioneering lines of Negishi (1979), Solow (1979), Shapiro and Stiglitz (1984), in a dynamic model involving heterogeneous agents and financial constraints as in Woodford (1986) and Grandmont, Pintus and de Vilder (GPV, 1998). Effort varies continuously while there is unemployment insurance funded out of taxation of labour incomes. Increasing unemployment insurance is beneficial to employment along the deterministic stationary state, and can even in some cases lead to a Pareto welfare improvement for all agents, through general equilibrium effects, by generating higher individual real labour incomes, hence larger consumptions of employed and unemployed workers, and thus a higher production. On the other hand, the local (in)determinacy properties of the stationary state are opposite to those obtained in the competitive specification of the model (GPV, 1998) : local determinacy (indeterminacy) occurs for elasticities of capitalefficient labour substitution lower (larger) than a quite small bound. Increasing unemployment insurance is more likely to lead to local indeterminacy and thus to generate dynamic inefficiencies due to the corresponding expectations coordination failures.

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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2006_60.

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Length: 38
Date of creation: 2006
Date of revision:
Handle: RePEc:ven:wpaper:2006_60

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Keywords: Efficiency wages; involuntary unemployment; unemployment insurance; effort incentives; local indeterminacy; capital-labour substitution; local bifurcations.;

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  1. 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.
  2. Frédéric Dufourt & Teresa Lloyd-Braga & Leonor Modesto, 2008. "Indeterminacy, bifurcations and unemployment fluctuations," Post-Print halshs-00815504, HAL.
  3. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
  4. Alexopoulos, Michelle, 2004. "Unemployment and the business cycle," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 277-298, March.
  5. Aloi, Marta & Lloyd-Braga, Teresa, 2006. "National Labour Markets, International Factor Mobility and Macroeconomic Instability," CEPR Discussion Papers 6015, C.E.P.R. Discussion Papers.
  6. Grandmont, Jean-michel, 1989. "Keynesian issues and economic theory," CEPREMAP Working Papers (Couverture Orange) 8907, CEPREMAP.
  7. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
  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. Jean-Michel Grandmont & P, A, Pintus & R, De Vilder, 1997. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Working Papers 97-28, Centre de Recherche en Economie et Statistique.
  10. Drèze,Jacques, 1991. "Underemployment Equilibria," Cambridge Books, Cambridge University Press, number 9780521393188, October.
  11. Nakajima, Tomoyuki, 2006. "Unemployment and indeterminacy," Journal of Economic Theory, Elsevier, vol. 126(1), pages 314-327, January.
  12. 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.
  13. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  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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