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Jobless Recovering and Equilibrium Involuntary Unemployment with a Simple Efficiency Wage Model

  • Jinpeng Ma



The U.S. economy had experienced the "jobless recovering" after the 1990-1991 and 2001 recessions, which has been constantly puzzling the economists, market analysts, and policymakers. This paper uses a simple hiring game in an efficiency wage model framework to resolve that puzzle. Our efficiency wage model emphasizes the importance of the local unemployment rate, which is endogenously determined by firms' hiring decision at a symmetric Nash equilibrium. Our model has a new feature such that nonzero steady involuntary unemployment at equilibrium may coexist with an efficiency wage that stays below the market-clearing wage. Moreover, we show how it is possible to use our model to study income inequality as a result of skill-biased technical change, inter-industry wage differentials, and skill wage premiums. We also demonstrate how it is possible to derive the wage curve (Blanchflower and Oswald (1994)) as an equilibrium locus of our model.

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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200404.

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Length: 20 pages
Date of creation: 17 Feb 2004
Date of revision:
Handle: RePEc:rut:rutres:200404
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  1. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
  2. Akerlof, George A, 1984. "Gift Exchange and Efficiency-Wage Theory: Four Views," American Economic Review, American Economic Association, vol. 74(2), pages 79-83, May.
  3. William T. Dickens & Lawrence F. Katz, 1986. "Interindustry Wage Differences and Industry Characteristics," NBER Working Papers 2014, National Bureau of Economic Research, Inc.
  4. Lawrence H. Summers, 1988. "Relative Wages, Efficiency Wages, and Keynesian Unemployment," NBER Working Papers 2590, National Bureau of Economic Research, Inc.
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  7. David Card, 1995. "The Wage Curve: A Review," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 285-299, June.
  8. Blanchflower, David G & Oswald, Andrew J, 1990. " The Wage Curve," Scandinavian Journal of Economics, Wiley Blackwell, vol. 92(2), pages 215-35.
    • David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x, June.
  9. Daron Acemoglu, 2002. "Technical Change, Inequality, and the Labor Market," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 7-72, March.
  10. Bharat Trehan, 2001. "Unemployment and productivity," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct12.
  11. 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.
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  13. Kelso, Alexander S, Jr & Crawford, Vincent P, 1982. "Job Matching, Coalition Formation, and Gross Substitutes," Econometrica, Econometric Society, vol. 50(6), pages 1483-1504, November.
  14. Carol Corrado, 2003. "Industrial production and capacity utilization: the 2002 historical and annual revision," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 151-176.
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  17. Stacey L. Schreft & Aarti Singh, 2003. "A closer look at jobless recoveries," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 45-73.
  18. Akerlof, George A & Yellen, Janet L, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 255-83, May.
  19. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
  20. Olivier Blanchard & Lawrence F. Katz, 1996. "What We Know and Do Not Know About the Natural Rate of Unemployment," NBER Working Papers 5822, National Bureau of Economic Research, Inc.
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