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Economic Recession, Efficiency Wage and Skilled Unemployment: A Theoretical Analysis


Affiliations
1 Department of Economics, Serampore College, Dt. Hooghly, West Bengal, India
2 Economics and Politics Department, Visva-Bharati University, Shantiniketan, Bhirbhum, West Bengal, India
     

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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.

Keywords

Economic Recession, General Equilibrium, Skilled Labour, Wage Inequality, Efficiency Wage Hypothesis, Gini-Coefficient.
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  • Economic Recession, Efficiency Wage and Skilled Unemployment: A Theoretical Analysis

Abstract Views: 167  |  PDF Views: 4

Authors

Dibyendu Banerjee
Department of Economics, Serampore College, Dt. Hooghly, West Bengal, India
Priya Brata Dutta
Economics and Politics Department, Visva-Bharati University, Shantiniketan, Bhirbhum, West Bengal, India

Abstract


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.

Keywords


Economic Recession, General Equilibrium, Skilled Labour, Wage Inequality, Efficiency Wage Hypothesis, Gini-Coefficient.

References