Long-Run Involuntary Unemployment in a Dynamic Efficiency Wage Model with Technical Progress and Heterogeneity

Abstract

This paper updates the Shapiro-Stiglitz (1984) efficiency wage model with technical progress. Involuntary unemployment may not necessarily exist in a long-run equilibrium even when efficiency wages resulting from competitive markets are paid. The effect of reducing real (monetary) unemployment benefits has an ambiguous (possibly negative) impact on employment. The implications of incorporating Okun's (1962) Law into the model are also briefly considered. Institutional factors that may cause involuntary unemployment are also discussed (intellectual property rights regimes and labour market restrictions, such as the minimum wage). Some behavioural perspectives that accord with the model are discussed. This updated model also serves as a (weak) theoretical defence of the Universal Basic Income (UBI) in terms of its potential impact on involuntary unemployment. For a UBI to be implemented, there must be a holistic reconsideration of intellectual property rights regimes (as well as other impediments to technical progress) as well as labour market restrictions. It is suggested that the UK's 'Productivity Puzzle' could be explained through this model (through constrained technical progress, labour market restrictions, unemployment benefits etc.)