Negishi–Solow efficiency wages, unemployment insurance and dynamic deterministic indeterminacy

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) and Shapiro and Stiglitz (1984), in a dynamic model involving heterogeneous agents and financial constraints as in Woodford (1986) and Grandmont et al. (1998). Effort varies continuously while there is unemployment insurance funded out of taxation of labor 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 higher production. In contrast, the local (in)determinacy properties of the stationary state are opposite to those obtained in the competitive specification of the model: local determinacy (indeterminacy) occurs for elasticities of capital‐efficient labor substitution lower (larger) than a quite small bound. Increasing unemployment insurance is more likely to lead to local indeterminacy and, therefore, to generate dynamic inefficiencies due to the corresponding expectations coordination failures.

Market distortions and local indeterminacy: A general approach

“…Hence, without any effects through labor, i.e. 23 The same could have been said if we had also considered distortions on the ̺ function. 24 Note that α * ΓL is close to -1 when β ΓL , α ΓK and α LL are close to zero.…”

“…The example we present here follows closely Grandmont (2008), where unemployment insurance 43 is introduced in a Woodford economy with efficiency wages (see also (Coimbra (1999), Nakajima (2006)). At equilibrium, these distortions only affect the generalized offer curve:…”

“…23 Hence, not only configurations (i) to (iv) are possible, but configurations (v) and (vi) may also emerge. These last two configurations require that α ΓL < α * ΓL as shown in (21).…”

“…Since θ is small and ε ̺,i appears multiplied by θ, distortions on the 10 See, for instance, Grandmont andal. (1998), Cazzavillan et.…”

Public Spending as a Source of Endogenous Business Cycles in a Ramsey Model With Many Agents

“…4 Note that in our framework, public spending externalities can be seen as a distortion on the labor market. See also Dufourt et al (2008) and Grandmont (2008) where distortions on the labor market, such that unemployment benefits, unions or efficiency wages, also generate local indeterminacy under plausible values of parameters.…”