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Unemployment and Wage Rigidity When Labor Supply Is a Household Decision

Author

Listed:
  • 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.

Suggested Citation

  • Basu, Kaushik & Genicot, Garance & Stiglitz, Joseph E., 2000. "Unemployment and Wage Rigidity When Labor Supply Is a Household Decision," Working Papers 00-10, Cornell University, Center for Analytic Economics.
  • Handle: RePEc:ecl:corcae:00-10
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    References listed on IDEAS

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    Cited by:

    1. Umaña-Aponte, Marcela & Bhalotra, Sonia R., 2012. "Women's Labour Supply and Household Insurance in Africa," WIDER Working Paper Series 066, World Institute for Development Economic Research (UNU-WIDER).
    2. Serrano, Joaquín & Gasparini, Leonardo & Marchionni, Mariana & Glüzmann, Pablo, 2019. "Economic cycle and deceleration of female labor force participation in Latin America," Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 53(1), pages 1-13.
    3. Kaushik Basu, 2006. "Teacher Truancy in India: The Role of Culture, Norms and Economic Incentives," Working Papers id:766, eSocialSciences.
    4. Matías Ciaschi, 2020. "Job loss and household labor supply adjustments in developing countries: Evidence from Argentina," CEDLAS, Working Papers 0271, CEDLAS, Universidad Nacional de La Plata.
    5. Dengta CHEN & Yinggang ZHOU, 2004. "Rational Panics, Absorbing Regime Switching and Stock Market," Econometric Society 2004 Far Eastern Meetings 680, Econometric Society.
    6. Marcela Umaña-Aponte & Sonia Bhalotra, 2012. "Women's Labour Supply and Household Insurance in Africa," WIDER Working Paper Series wp-2012-066, World Institute for Development Economic Research (UNU-WIDER).
    7. Yinggang ZHOU, 2004. "Rational Panics, Absorbing Regime Switching And Stock Market," Econometric Society 2004 Far Eastern Meetings 681, Econometric Society.
    8. 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.
    9. repec:unu:wpaper:wp2012-66 is not listed on IDEAS
    10. Sonia Bhalotra & Marcela Umaña-Aponte, 2010. "The Dynamics of Women’s Labour Supply in Developing Countries," The Centre for Market and Public Organisation 10/235, The Centre for Market and Public Organisation, University of Bristol, UK.
    11. Delprato, Marcos & Akyeampong, Kwame, 2019. "The effect of working on students’ learning in Latin America: Evidence from the learning survey TERCE," International Journal of Educational Development, Elsevier, vol. 70(C), pages 1-1.

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    More about this item

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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