Saturday, May 9, 2015

Marginal Product of Labor in the Shapiro and Stiglitz Model

Dear Professor, 

Thanks fir putting those lessons on youtube!

I saw your video on the Shapiro Stiglitz Model and my doubt is regarding the comparative statistics of Marginal Productivity of Labour with unemployment and wages.

According to my understanding, when unemployment increases, the wages should decrease as firms do not need to offer high wages to prevent workers from shirking, unemployment acts as a disciplining tool.
How does the Marginal Productivity of Labour vary with this? Does is it Increase as well?

Best Regards
Utkarsh Katyaayun

My Response:

First, I'm sorry this has taken a while.  I didn't see the question until this morning.   

The Shapiro-Stiglitz model is quite conventional on the productivity side.  There is a production function for each firm.  That determines output based on the number employees hired (assuming they don't shirk).  The unemployment rate in the market doesn't impact productivity at an individual firm at all, if the workers put for effort.  In other words, the marginal product of labor curve looks just like the it does for a neoclassical firm in intermediate microeconomics.

All the interaction is on the incentive side.  There, as you say, if the unemployment rate is higher, which means future job acquisition is lower once unemployed.  So the efficiency wage need not be as great then.