Challenging Shapiro on involuntary unemployment

A particularly famous efficiency-wages model was the one devised by Shapiro & Stiglitz (1984) - a ‘shirking’ model. The main assumption is that there is imperfect, asymmetric information and that workers have a choice to work or ‘shirk’ (exert little or no effort) and that there is a probability that employers catch them and that they don’t catch them. From this simple assumption, Shapiro & Stiglitz conclude that the wage-rate paid in the market will be an efficiency-wage that is higher than the market-clearing wage. The model predicts that there will necessarily be involuntary unemployment in equilibrium which supposedly acts as a ‘worker discipline device’ since it discourages workers from shirking because their being fired would mean that there is a possibility that they may not find another job. For those who are interested in a graphical representation, the graph below depicts the Aggregate Labour Demand (ALD) curve, the Aggregate Labour Supply curve (ALS – which also presumes a competitive labour supply), the Non-Shirking Condition (NSC) and the Efficiency Wage (EW) at equilibrium.

Several of the underlying assumptions can be challenged, however. For example, since the state of technology enters the Aggregate Labour Demand relation and the state of technology is not static but it actually improves over time, when we take a dynamic view of the Shapiro-Stiglitz model, we find that the positive technology shocks consistently shift the ALD curve outward.

Furthermore, Shapiro & Stiglitz make a simplifying assumption that the worker believes the likelihood of finding another job (if fired) is equivalent to the proportion of unemployed people – this simplification means that, at the limit of full employment, the Non-Shirking Condition (NSC) cannot intersect with the Aggregate Labour Supply (ALS) – this means that full employment is a theoretical impossibility. In reality, however, people have individualised estimates with respect to how likely they are to get another job if they are fired (based, for example, on their estimation of their own ability, how well their skills match to vacancies and other variables) – this more realistic assumption makes full employment possible.

Remember, how the Aggregate Labour Demand curve experienced constant positive technology shocks over time? Well, this subsequently means that there would be full employment since the NSC and the ALD would intersect at or beyond the ALS curve as time progressed. However, the outcome of full employment here presumes static population growth. In reality, the population changes over time (generally, the ALS might shift right over time to signify an increase in the population over time) and, because of this, the conclusion of the model becomes ambiguous.

Simplified models yield nice conclusions whilst more complex models yield ambiguous results. With Shapiro & Stiglitz’s initially realistic assumption, one may have thought that involuntary unemployment was going to be an inevitable labour market outcome even in a competitive labour market. However, when relaxing the accompanying unrealistic assumptions, it’s not so straightforward.shapir(ho ho ho)

A Capitalist Carol, Stave 1

Capitalism was dead: to begin with. There is no doubt whatever about that. Its utter demise was reported by the BBC coverage of the financial crash, registered by the Occupy Movement, and solemnised on the steps of Downing Street by Ed Splurge himself, a copy of the General Theory and a thirty-seven-point public spending plan in his hand. Capitalism was as dead as a doornail.

How could it be otherwise? Splurge knew capitalism well; they had been adversaries as long as anyone could remember. Splurge’s party had been harping on about the instability of capitalism for seventy years, though nobody else seemed aware of it – certainly not capitalism, which annoyingly went on and on, producing economic growth and prosperity. Even China and India got in on the act, lifting billions out of poverty by entering the global trading network. But Splurge knew that one day, capitalism’s inherent contradictions would strangle it; and at last, inexplicably to his Keynesian advisers but joyously for all that, the day had come.

Oh! But he was a generous hand at the subsidies, Splurge! Soft and proliferous as rabbits, open to any entreaty, always ready to dispense a trifle here, a trifle there, from the public finances. Splurge found it blissfully easy to be generous with other people’s money. And today, the usual band of supplicants – farmers of crops and wind, builders of pointless railways, teachers and doctors – was swelled by new crowds: of bankers, mortgage lenders and insurers, all pleading to him for bail-outs. Before the day was out, he would have nationalized all the latter, with a smile.

“We will need many more public servants,” Splurge told his Downing Street staff, to warm applause. But his press officer, in letting himself out to spread this news, had let two other people in. They were a thin couple, with briefcases and small reading-glasses, who announced that they represented the Office for Budget Responsibility.

“At this stage in the economic cycle,” said one, picking up a pen, it is more than usually desirable that governments should make some provision to balance their books. Many thousands are living on public subsidies. Hundreds of thousands are struggling to pay their taxes. What spending cuts shall I put you down for?”

“Nothing!” Splurge replied. “Are there no presses at the Royal Mint?” he asked. “Are there no work-creation schemes?”

“Plenty of presses,” said one of the representatives, “and running hot as always.” “And countless work-creation schemes,” said the other, “each struggling to create any work at all.”

“Oh! I was afraid, from what you said at first, that something had occurred to stop expansionary policy in its useful course,” said Splurge. “I’m very glad to hear it is still going.”

Seeing clearly that it would be useless to pursue their point, the OBR representatives withdrew. Splurge resumed his labours, signing cheques and issuing public procurement orders with an improved energy. He must have been doing it for hours.

And then, “God save you, uncle!” cried a familiar voice. It was Splurge’s nephew, fresh from his class on Austrian Economics. “Recession to you is but a time for paying bills without money, or at least for borrowing it from the next generation. My classmates and I do not know how we will get by, with all the money that your generation has stolen from us!”

“Bah! Humbug!” said Splurge. “Good afternoon, nephew!”

“I am sorry, with all my heart, to find you so resolute. Like everyone else in the country, I try to keep my books balanced. What is prudence in the conduct of every private family can scarce be folly in that of a great nation!”

“Good afternoon!”

His nephew left the room, without an angry word, but with a look of disappointment about him. The clerk in the outer office involuntarily applauded Splurge’s resolution.

“And you, and your fellow public servants, I suppose, in these difficult times you will be wanting me to raise your pay? Increase your index-linked pensions? Bring in paternity leave? Extend your paid holidays? Recruit more assistants? And cut interest rates?”

“Oh, yes sir!” said the clerk.

“Very well then,” replied Splurge. “We do need to spend to revive the economic system. Have the papers drawn up for my signature tomorrow!”

And with that, spent out by the day’s events, he made his way tired but happy up to his private apartment on the top floor of Downing Street, where a generous supper awaited him.

Now, it is a fact, that there was nothing at all particular about this, in that he dined free at the public expense every day.

So let any man explain to me, if he can, how it happened that Splurge, having this free feast before him, felt a strange need to check his own wallet, and saw on one of the banknotes an eery image of someone he thought he had put out of his mind for good…

Right question, wrong solution here

Given that it is Christmas Day an opportunity for us to play The Grinch. There’s a certain amount of truth in the analysis here, although not a great deal. It’s just the solution proposed that is wrong:

Some people in private rental accommodation are having to cut back on food and heating to cope with rising rents, according to research by the National Housing Federation (NHF).

The organisation, which represents housing associations across England, said soaring rents and high deposits were making life increasingly difficult for those locked out of homeownership.

In a survey of 1,183 private tenants it found that 41% of those with children had struggled to pay their rent at least once. Across all tenant households, 31% had been in difficulties.

More than a quarter of the families surveyed said they had cut back on buying food to meet their housing costs, and just under a quarter had cut back on heating.

Well, yes, we’re sure this happens. As it also happens that some in social housing cut back on heating and or food to afford their rents, as those in owner occupied housing cut back on both or either at times in order to pay mortgages or maintenance bills. This is simply a fact of life for anyone at all facing income constraints. As all of us do of course. Our desires are unlimited and our incomes, as with the more general point about economic resources, are limited.

It is, of course, possible to insist that the general cost of housing (of any and all types) is “too high” and thus propose solutions to this perceived problem.

The group called on the government to provide more affordable homes for families on low and middle incomes. Its chief executive, David Orr, said: “We have too many renters just keeping their heads above water, who are being kept awake at night and suffering from stress over the worry of paying the next rent bill.

“The government needs to come up with a bolder, long-term plan for housebuilding so that families across the country can find the homes they need, at a price they can afford.”

And a bold new plan would also be a nice idea. But that call on the government “to provide” is the wrong way to go about this. For it is the government, as we’ve said innumerable times before, with the Town and Country Planning Acts, that is the problem. Those acts artificially restrict the pieces of land upon which housing may be built. Thus housing, as a result of those restrictions, is more expensive than it would be without the restrictions. This is true of any form or sort of housing: owner occupied, rental, social, “affordable” or otherwise.

And the solution is obvious: loosen those restrictions on what may be built where.

As, of course, happened in the 1930s when the scale of housebuilding was what actually dragged the country up out of recession.

That would be a nice seasonal present, would it not? The government solving the housing problem by the government stopping doing what the government has done to create the housing problem?

The divorce of theology from modern social science and public policy

In modern discourse, talk of God, divinity, spirituality and so on is forcibly divorced from the sciences (considered in the broadest sense). Contemporary mainstream moral philosophy, political economy, political science, economics (not to mention the natural sciences) rarely, if at all, discuss the consequences of the nature of God for the questions they all address.

Consider this: God, by definition, is omnipotent, omnipresent and omniscient. Now, without introducing any metaphysical complications, we can say that either God exists or God doesn’t exist (my opinion is that the former is true). If God doesn’t exist, then we can continue working within and articulating the scientific paradigms that currently permeate throughout society. However, as soon as we presume God’s existence, theology becomes fundamental for understanding any other form of knowledge whatsoever. It becomes a primary concern of metaphysics, epistemology and logic. This then feeds through to the sciences that we practice, albeit imperfectly, in modern society. Depending on the presumed conception of God, methodologies and their employment as well as theories and their applications will differ accordingly.

In Plato’s Republic, Socrates considers the nature of the Gods whilst describing his grand, centrally planned society. In India, the caste system is said to have had divine origins (though its interpretation and enforcement became increasingly skewed with time) and this has exerted a profound impact on the socioeconomic organisation of the subcontinent that continues to this day. One of the most famous miracles of Jesus Christ was feeding the multitude with one loaf of bread – to put it simply, divinity can deal with the fundamental economic problem of scarcity for the welfare of all.

Benedict de Spinoza, like many other philosophers and theologians of his age and the preceding ones, offers his readers an account that includes both a proof and a description of the nature of God; to put one of the main conclusions in Spinoza’s Ethics crudely; everything that comes naturally and feels right is good because it has its origins in God and God is good. Now, that which comes naturally is done freely and, intuitively, freedom feels right.

So all this talk of free markets and a free society has a natural resonance with humanity. There is something undoubtedly divine about free will, freedom and a free society.

Why is Polly whining about Downton Abbey?

La Toynbee is whining about Downton Abbey. How it shows the appallingness of old English society and how we’re coming back to that masters and servants type world again. Hmm:

To control history by rewriting the past subtly influences present attitudes too: every dictator knows that.

Well, yes, quite.

What we never see is bedraggled drudges rising in freezing shared attics at 5.30am; slopping out chamber pots, heaving coal, black-leading grates, hauling cans of hot water with hands already made raw by chilblains and caustic soda. We never dwell on the hardship of scrubbing floors, or scrubbing clothes, or scouring grease; in pre-detergent days, they were up to their elbows all day long. And yet they had virtually no water or time for washing themselves. Servants were often sooty and dirty. They smelled strongly of sweat, with few clean clothes, says Dr Lucy Delap, author of Knowing Their Place: Domestic Service in Twentieth-Century Britain. She says they used patchouli oil to cover the sweat, the identifying aromas of hard service. In Mrs Woolf and the Servants, Alison Light records Virginia Woolf observing “Mabel sweats when she is making jam”. Even the somewhat more enlightened and sometimes embarrassed Bloomsbury set wrote of their “inferiors”, Woolf talking of “that poor gaping imbecile, my charwoman”.


Modern capitalism promotes the myth that we are all masters of our fate and birth is not destiny, as proof that swelling wealth at the top has been earned.

And that’s where it jars. For it is modern capitalism that has stopped people having to carry water in chilblained hands. Stopped the scrubbing over the boiling laundry, the wrestles with the mangle. This is what both Hans Roslin and Ha Joon Chang, quite correctly, refer to as the technology of the washing machine. It’s possibly the outstanding achievement of modern capitalism that it has managed to mechanise all of these domestic chores, freeing up large portions of the human race to do something more interesting and less exhausting.

The bits that are left out of Downton Abbey are exactly the bits that justify capitalism itself: the reduction in human drudgery. And no, socialism didn’t do this: your humble author has been the less than proud owner of a Soviet washing machine and it did not remove said drudgery. This is exactly what is meant by the complaints that the Soviets concentrated upon heavy industry rather than consumer products.

There is, of course, something else that Polly’s left out. Historically, in Britain at least, being a servant was more akin to an apprenticeship than anything else. Something done between puberty and marriage for the vast majority of those who did it. Only those who went on to become the senior servants (housekeeper, butler and so on) were likely to make a “career” of it. Being in service was, for most, a phase, not a life sentence.

No, we most certainly don’t want to bring back mass service. Quite apart from the fact that the capitalist technology makes it irrelevant as an institution. But perhaps we could do without those who try “To control history by rewriting the past”?