Equilibrium Unemployment as a Worker Discipline Device Carl Shapiro and Joseph Stiglitz

Conventional paradigm All workers receive the market wage and there is no unemployment. – Existence of involuntary unemployment – Wages fall to clear market? – Workers have an incentive to shirk.

A firm’s reaction To pay more than the “going wage” so if a worker is caught shirking and fired, he will pay a penalty. All firms raise their wages. Still, a penalty is there because demand for labor decreases after wage increases, and unemployment results.

Penalty depends on rate of employment Unemployment benefits increase the unemployment rate. – Higher wages induced, hence less demand for labor Wages adjust slowly when shocks occur. – Wage decrease to match the growth in the unemployment Wage distributions persist for identical workers. – Firms find shirking particularly costly offer higher wages.

Where the theory applies Not the only or even the most important source of unemployment Lower-paid, lower-skilled, blue-collar occupations