Open Access Subscription Access
Open Access Subscription Access
Economic Recession, Efficiency Wage and Skilled Unemployment: A Theoretical Analysis
A three sector specific factor competitive general equilibrium model is developed for a small open economy where unemployment of skilled labour is explained using Efficiency Wage Hypothesis (EWH). In this model efficiency of a skilled worker, which is specific to high skill urban sector, varies positively with its wage and the unemployment rate. Using such a framework we have examined the impact of economic recession on skilled - unskilled wage inequality and skilled unemployment of the economy. We have also analysed the effect of recession on social welfare by considering Gini-coefficient and welfare measure of Sen (1974). The analysis finds that economic recession improves the average unskilled wage of the economy as well as the skilled-unskilled wage gap, but economy - wide effective skilled unemployment might get reduced. Finally it is observed that the impact of recession on Gini-coefficient is indeterminate and, interestingly, overall social welfare and wage inequality might not move in the same direction.
Economic Recession, General Equilibrium, Skilled Labour, Wage Inequality, Efficiency Wage Hypothesis, Gini-Coefficient.
- Agell, J., & Lundborg, P. (1992). Fair Wages, Involuntary unemployment and Tax Policy in the Simple General Equilibrium Model. Journal of Public Economics 47, 299-320.
- Agell, J., & Lundborg, P. (1995). Fair Wages in the Open Economy. Economica 62, 335-351.
- Akerlof, G., & Yellen, J. (1990). The Fair Wage Effort Hypothesis and Unemployment. The Quarterly Journal of Economics 105, 255-283.
- Chaudhuri, S. (2011). Economic recession, skilled unemployment and welfare, Economic Modelling 28(3), 1435-1440.
- Chaudhuri,S., & Banerjee, D. (2010a). Foreign Capital Inflow, Skilled-unskilled Wage Inequality and Unemployment of Unskilled Labour in a Fair Wage Model. Economic Modelling 27(1), 477-486.
- Chaudhuri, S., Banerjee, D. (2010b). FDI in agricultural land, welfare and unemployment in a developing economy. Research in Economics 64 (4), 229-239.
- Feher, E. (1991). Fair Wages and Unemployment. Vienna: Dept. of Economics, University of Technology, vienna. Gupta, M. R. (2000). Duty Free Zone and Unemployment in a Fair Wage Model. Keio Economic Studies 37, 33-44.
- Gupta, M. R., & Dutta, P. B. (2011). Skilled-unskilled wage inequality and unemployment: A general equilibrium analysis. Economic Modelling 28 , 1977-1983.
- Gupta, M. R., & Dutta, P. B. (2013). Skilled-unskilled wage inequality and imitation in a product variety model: A theoretical analysis. The Journal Of International Trade and Economic Development , 22 (2), 181-208.
- Gupta, M. R., & Gupta, K. (2001). Tax Policies and Unemployment in a Dynamic Efficiency Wage Model. Hitotsubashi Journal of Economics 42, 65-79.
- Marjit, S., Kar, S., Chaudhuri, S., (2011). Recession in the skilled sector and implications for informal wage. Research in Economics 65 (3), 158-163
- Pisauro, G. (1991). The Effect of Taxes on Labour in efficiency wage Models. Journal of Public Economics 46 (3), 329-345.
- Pissarides, A.(2013). Unemployment in the Great Recession. Economica 80 (319), 385-403.
- Sen, A.K. (1974). Informal bases of alternative welfare approaches: aggregation and income distribution. Journal of Public Economics 4, 387-403.
- Shapiro, C., & Stiglitz, J. E. (1984). Equilibrium Unempolyment as a Worker Discipline Device. The American Economic Review 74, 433-444.
Abstract Views: 167
PDF Views: 4