Who is Shapiro-Stiglitz? Is he knew?

What is involuntary unemployment? Do people volunteer to be unemployed? It's a stupid phrase.

Well, i'm sure people on the right would say that some people are voluntarily unemployed, so they can get unemployment benefits, but again, I really just want help rather than debate

@ Draugnar: In terms of this model, "involuntary" unemployment means people who are unemployed despite actively searching for work, being generally employable, and being willing to accept a market-level wage.

"Voluntary" unemployment, by contrast, for the sake of this model, would be people who were capable of working, but were effectively choosing not to work by demanding a reservation wage above what the market was offering.

More here: http://en.wikipedia.org/wiki/Involuntary_unemployment

@ Socrates - as for your question, I would predict that a fall in real unemployment benefits would have the effect of increasing the rate of involuntary unemployment, because it would prompt an increase in the supply of labour while the demand for labour remained unchanged.

Under President Bill Clinton there was a change to unemployment law, that basically meant individuals would have to get training, be in school, etc, (I don't remember the exact specifics) in order to continue to receive unemployment. The (insane) cry from the left was that people would lose benefits and we'd have people dying on the street of starvation. WHOOPS....what happened was that when people realized they had to work a lot of "voluntary" unemployed people suddenly found jobs.

The demand for labor might actually be reduced as the voluntary now are often highly skilled and demand that edtra pay/benefits because they know they are worth it and cam hold out for the right job. They would be the one's many employers would hire thereby reducing the available jobs and still have the current level of involuntarily unemployed being what it is or higher.

any argument for it lowering the rate of involuntarily unemployment? Perhaps that firms will be employing more people, meaning that some people who were 'involuntary unemployed' would now be being hired?

Eliminating benefits won't create jobs. It won't destroy them either. It has zero effect on the number of available jobs. It will just turn more people into involuntary status and artificially deflate the unemployment rate because of the people no longer collecting not being counted as unemployed any more.

Eliminating jobs lowers the wage that people demand which means that more people will be hired? if you could hire 5 workers before you can now hire 6, which you would do, ad the marginal cost would have decreased (but not the marginal revenue).

Draugnar is right, I think. Adjusting the level of welfare benefits may affect the *supply* of labour, but it has no effect whatsoever on the *demand* for labour.

Why would a cut in benefits cause firms to employ more people?

The only possible way I could conceive of a benefit cut bringing about increase in labour demand would be if a government cut benefits, and invested the money saved from welfare spending in a specific project designed to create employment - for example using the funds not paid out in benefits to pay for a new school-building programme which would increase the demand for construction workers...

Hang on, what, SD? You were talking about a cut in *benefits*, not a cut in, say, the minimum wage.

we agree that a cut in benefits would encourage more people to work, and that the greater supply of labour would decrease wages don't we? and if wages decreased then the marginal cost of another worker would be lower,, so firms would hire more people until marginal cost and marginal revenue were equal? my post yesterday made no sense, i really needed to sleep/

The basic takeaway from the Shapiro-Stiglitz model is that workers work hard (as opposed to shirking) if they fear unemployment. Everything else being the same, unemployment benefits (compared to no unemployment benefits) would increase the amount of shirking done on the job, because it increases the payout if you get caught shirking, thereby incentivizing shirking. In this sense unemployment insurance literally is insurance -- if you shirk you take the risk of being caught and fired; unemployment insurance lets you hedge to an extent by paying out money if you are caught and fired (unless you don't qualify for unemployment payments).

Consequently one would expect a fall in unemployment benefits to decrease shirking. This lowers the necessary efficiency wage to combat shirking, because an outside variable (unemployment benefit availability) decreased the incentive to shirk. The efficiency wage would fall and thus involuntary unemployment would fall as well.

Essentially a decrease in unemployment benefits disincentivizes unemployment, which increases the cost of shirking, which decreases the occurrence of shirking, which decreases the need for an efficiency wage to combat shirking, which lowers the efficiency wage, which increases hiring and decreases involuntary unemployment.

And yes the demand doesn't change with a decrease in the price of the good (in this case labor employed); the demand schedule remains what it is. But the *quantity demanded* may increase depending on marginal values of labor.

ex: If Worker A provides a marginal value of $50/hr and Worker B provides a marginal value of $40/hr, then with an efficiency wage of $45/hr I'm only going to hire A. If the efficiency wage falls to $35/hr then I'm going to hire A and B.

Of course the specific marginal values of each individual laborer change according to countless other variables, but across the entire economy we would expect some laborers who previously weren't hired to be hired due to the fact that their efficiency wage is now lower than it was.

That's great, thanks PE. Is there a way in which involuntary unemployment goes up if unemployment benefits decrease?

The decrease of real unemployment benefits also reduces frictional unemployment, since fewer people will be willing to try to look for a better job and the time they spend on looking for a new job will be lowered, leading to inefficient allocation of labour and thus lower performance of the economy.

It would also lead to slower rise of salaries on the lower end of the spectrum, since the income difference between low-skilled employed labour and unemployed labour would be greater in the short-term. Wage stickiness would prevent a fall in low-end salaries but they would rise less in the mid-term than if the unemployment benefits stayed the same. Long-term wise, both unemployed and lower wage workers would be worse off, possibly making more of them dependant on other sorts of government handouts. This might also eventually lead to decreasing the size of the labour force - students might want to study longer than work for relatively less or risk lower-earning unemployment, parents might want to stay home with little children longer for the same reason, people nearing retirement might retire prematurely for the same reason.

I think the relation is:

lower unemployment benefits -> higher employment though less efficiently allocated, lower involuntary unemployment (unemployed must work to retain the same living standards), lower voluntary unemployment (workers are less willing to risk unemployment), smaller labour force (people at the lower-end wage with possibilities to avoid being part of the labor force will be more willing to do so).

higher unemployment benefits -> lower employment though more efficiently allocated, higher involuntary unemployment, higher voluntary unemployment, bigger labour force.

*lower involuntary unemployment (lower efficiency wage means more people will be hired)
**higher involuntary unemployment (higher efficiency wage means less people will be hired)

Messed those parts a bit, made them sound like voluntary unemployment.

" that the greater supply of labour would decrease wages don't we?"

Even if it did, people don't get paid for doing nothing. There has to be *work* needing to be done.

I agree with that, but in market economics workers (capital in general) is hired until marginal cost is equal to marginal revenue, if cost goes down then marginal cost is less than marginal revenue so you would hire more. We don't really discuss if there is work that needs to be done, because we are assuming that there probably is, and that the reason more people aren't hired is because of the cost, rather than a lack of work.

also, thanks ulytau!

What I mean by the above is if there is no business to support it, an employer isn't just going to hire people out of the goodness of his heart. And if there is business, wages make no difference as he will hire the number of people he needs to get the job done and his prices will reflect the cost of the employees' wages.

And arguably, it won't lower the cost of wages for professional positions, can't lower the cost of wages for union jobs, and there is nowhere to go on minimum wage jobs. So, no, it won't lower the wages at all. If anything, it will cause more unions to form even at the professional level if you try to lower those wages.

actually it's implicit in the "marginal cost = marginal revenue" clause; if there's no work to be done then marginal revenue is very low or zero, and the marginal cost (read: hourly wage) will be higher than marginal revenue, leading the person not to be hired

re: decrease in unemployment benefits => increased involuntary unemployment -- they might coincidentally end up correlating, but I don't see a factor that would lead a decrease in unemployment benefits to *cause* an increase in involuntary unemployment, no. I might be missing a factor but afaik, no

"then marginal cost is less than marginal revenue so you would hire more"

No. That only works for blue collar labor which is generally already minimum wage or union protected. The smart employer knows throwing more people at a professional job (more docs in a hospital, more lawyers on a case, more developers or engineers on a project) doesn't make the work go faster. It actually makes things worse as we get territorial.

My point is, there would be no reduction in wage. Your not taking into account the fact that it's people, not cattle, we are talking about. Theoretical numbers all look good, but they don't take into account that people have personalities and people have certain minimum standards and people join together to fight back against a repressive system that tries to hold them down.

Plus, what are you gonna do? Cut existing workers wages? Expect lawsuits and plenty of work for lawyers if you do.

okay so

Draugnar, you're not technically wrong here, but you're introducing extraneous variables that are outside the scope of the model. Unions don't specifically matter here because they drive up wages regardless of the ebb and flow of the market. We're holding everything else constant, which you have to do to make these sort of analyses work. Implicit in every sentence of analysis here (or should be) is "everything else the same," which means the effect of unions/etc. doesn't come into play here.

Never mind, I didn't read your last couple of posts.

You're definitely off-point here. We're talking across all industries as a particular trend. The minutia of a particular industry doesn't matter here.

@PE, thanks again, and i'm probably completely wrong here, but since a decrease in unemployment benefits presumably lowers the reservation wage of some people that are voluntarily unemployed, could we not say that less people would be voluntarily unemployed, and this greater competition would make more people involuntarily unemployed?

@draug, the beauty of this economic class is that it is we don't have to consider whether there are strong unions or minimum wage (or if we do it adds to the analysis, but we focus on free market assumptions). Also, if we wanted to get pratical, I would turn to what Marx says (and what we say in economics funnily enough), that there is a reserve army of the unemployed, which weakens the bargaining position of any people that want to fight back. Although this stuff is interesting, I don't feel like my professor will care too much for this debate

ah, yeah, you could have displacement of one group of unemployed by another due to competition, but as far as I can see the effect should go either way; the voluntarily unemployed don't have a particular edge in the competition for jobs vis-a-vis involuntarily unemployed workers, so you might see a rise in one type of unemployment rate contrary to expectations, but it would be complemented by an equivalently drastic decrease in the other kind of unemployment rate, if that makes sense

so i could make the points about it would decrease involuntary unemployment because marginal cost goes down etc., but i could also say that there is the potential for the influx of voluntary unemployed people into employment to cause a rise in the involuntary unemployed (either because they win out in competition against involuntarily unemployed, or because they become involuntarily unemployed) - as long as i state that 1) there would also be a decrease in the voluntary unemployed to account for this, and 2) that the decrease in marginal cost leading to greater employment will probably offset any effect that the new compeitiotn might have?

But a worker =/= another worker. Sure, there is 8% unemployment across the board right now, but specific industries have more and others have less. And you can't just fill skilled labor positions with someone who doesn't have that skill. I could no more perform surgery than a forklift operator could do my job or a doctor could do the forklift operator's job. We have unique skillsets and lumping us all together as "workers" may work for your model, but it doesn't work in practice. You say I introduce variables. I'm not introducing them, they exist. Period. A model is useless if it doesn't take into all the known factors. There will always be unknown factors, but this doesn't even take into account the known factors.

"And arguably, it won't lower the cost of wages for professional positions, can't lower the cost of wages for union jobs, and there is nowhere to go on minimum wage jobs. So, no, it won't lower the wages at all."

This is of course true but you don't actually need to lower the wages - you just don't raise them for a while to achieve the same relations as before. You are right about the difficulties with which labour market clears in reality but the end result will simulate what PE wrote, it will just take longer. Since we are talking theory and not policy implementation, your argument is not a strong counterpoint. "Lowering wages" can be replaced with a functionally identical "freezing of wages" and the mechanic is still the same - though it makes the discussion less clear and that is generally not a good thing. Of course, some people are unable to understand that pure theory leads to bad policy implementation and that you MUST pay attention to your model's assumptions and real-world specifics but that is a different discussion.

I'm just not a fan of theories that don't take into account reality. But OK, if you just want to discuss this particular theory, have at it. I'll stay out because it is obviously total bull not based on reality at all as it doesn't take into account not only the factors I've already mentioned but the fact that reducing the typical wage or even just freezing it also means less spending power for the consumers because the workers are the consumers and when they stop having discretionary funds, they stop buying TVs and premium cars and new homes and such, which in turn causes the economy to stagnant and drives a repression leaving towards a depression.

But you all go ahead and theorize.

Why did you even come into the fucking thread when it was explicitly asking about the implications/ramifications of one particular theory if you weren't interested in discussing it?

I'll leave your blatant lack of understanding it aside because I'm more interested in your motivation for even coming in here if you don't "buy" several fundamental tenets of economic analysis.

Implications and ramifications... I thought I covered that. Debunking the theory because it doesn't account for the implications and ramifications of trying to put it into effect. You don't like that the theory can't stand up to scrutiny? If you want to discuss the implications and ramifications of cutting unemployment benefits as proposed in some theory, then expect to have the theory debunked as bad because it doesn't account for all the implications and ramifications when all the factors of real world economics are implemented.

I'm all up for debunking theories - hey I'm a Marxist, arguing against neoliberal and even Keynesian theories is my idea of fun; but, for an assignment asking you to illustrate your in depth understanding of certain models, I try to illustrate my understanding of the model rather than show them why the model I wrong.

Also PE, (and uly), you've already helped loads, but if you could respond to my last post so that I'm completely sure of my ideas that would be great :)!

Well, then my apologies. I thought you actually wanted to learn something, not just write a paper spewing forth what your professor of "theories" wanted spewed forth. I always thought college was meant for learning, not reciting theoretical bullshit spoon fed from a professor who has never worked in the real world.

Economics at this level is generally comprehension rather than personal analysis - I have politics and philosophy for criticising theories. And as much as I want to "learn something", I want a good grade more. And whilst I, as I said, love to criticise these spoon fed theories, there is value in truly understanding them - not just to criticise them better - but they are the theories that, through economists in government, the world bank etc. shape and make the economic policies of the world.

Draugnar, just admit you opened your mouth and stuck your foot in it so we can move on.

SD, I think your last post ("so i could make the points about") follows, yes. I'm reading a little quickly while prepping for -- wait for it -- an econ test (small world huh? well, sorta, yours isn't a test, but... you get it), so lemme reread it after the test to be sure but from what I see, no issues here

Yeah, I admit I thought we were going to discuss the theory in practice, not just the theory. So I'm through discussing it here. If you want to make a thread just for discussing all the real world implications and ramifications, I will happily participate there. This will be my last post here so you theorists can discuss the theory in it's little theory bubble.

Econ test/econ assessment - basically the same! Thanks a lot again :)

bump

Oh, yeah, sorry, forgot to post. On rereading it still looks all good, I think you're in the clear SD. Good luck on the assignment!

Thanks a lot PE! I hope your test went well