Welfare

Abstract: Involuntary unemployment appears to be a persistent feature of many modem labor markets. The presence of such unemployment raises the question of why wages do not fall to clear labor markets. In this paper we show how the information structure of employer-employee relationships, in particular the inability of employers to costlessly observe workers' on-the-job effort, can explain involuntary unemployment' as an equilibrium phenomenon. Indeed, we show that imperfect monitoring necessitates unemployment in equilibrium. The intuition behind our result is simple. Under the conventional competitive paradigm, in which all workers receive the market wage and there is no unemployment, the worst that can happen to a worker who shirks on the job is that he is fired. Since he can immediately be rehired, however, he pays no penalty for his misdemeanor. With imperfect monitoring and full employment, therefore, workers will choose to shirk. To induce its workers not to shirk, the firm attempts to pay more than the "going wage"; then, if a worker is caught shirking and is fired, he will pay a penalty. If it pays one firm to raise its wage, however, it will pay all firms to raise their wages. When they all raise their wages, the incentive not to shirk again disappears. But as all firms raise their wages, their demand for labor decreases, and unemployment results. With unemployment, even if all firms pay the same wages, a worker has an incentive not to shirk. For, if he is fired, an individual will not immediately obtain another job. The equilibrium unemployment rate must be sufficiently large that it pays workers to work rather than to take the risk of being caught shirking. The idea that the threat of firing a worker is a method of discipline is not novel. Guillermo Calvo (1981) studied a static model which involves equilibrium unemployment.2 No previous studies have treated general market equilibrium with dynamics, however, or studied the welfare properties of such unemployment equilibria. One key contribution of this paper is that the punishment associated with being fired is endogenous, as it depends on the equilibrium rate of unemployment. Our analysis thus goes beyond studies of information and incentives within organizations (such as Armen Alchian and Harold Demsetz, 1972, and the more recent and growing literature on worker-firm relations as a principal-agent problem) to inquire about the equilibrium conditions in markets with these informational features. The paper closest in spirit to ours is Steven Salop (1979) in which firms reduce turnover costs when they raise wages; here the savings from higher wages are on monitoring costs (or, at the same level of monitoring, from increased output due to increased effort). As in the Salop paper, the unemployment in this paper is definitely involuntary, and not of the standard search theory type (Peter Diamond, 1981, for example). Workers have perfect information about all job opportunities in our model, and unemployed workers strictly prefer to work at wages less than the prevailing market wage (rather than to remain unemployed); there are no vacancies. *Woodrow Wilson School of Public and International Affairs, and Department of Economics, respectively, Princeton University, Princeton, NJ 08540. We thank Peter Diamond, Gene Grossman, Ed Lazear, Steve Salop, and Mike Veall for helpful comments. Financial support from the National Science Foundation is appreciated. 'By involuntary unemployment we mean a situation where an unemployed worker is willing to work for less than the wage received by an equally skilled employed worker, yet no job offers are forthcoming. 2In his 1979 paper, Calvo surveyed a variety of models of unemployment, including his hierarchical firm model (also with Stanislaw Wellisz, 1979). There are a number of important differences between that work and this paper, including the specification of the monitoring technology.

Abstract: 1. Introduction PART ONE: VARIETIES OF WELFARE CAPITALISM 2. The Democratic Class Struggle Revisited 3. Social Risks and Wefare States 4. The Household Economy 5. Comparative Welfare Regimes Re-examined PART TWO: THE NEW POLITICAL ECONOMY 6. The Structural Bases of Postindustrial Employment 7. Managing Divergent Employment Dilemmas PART THREE: WELFARE CAPITALISM RECAST? 8. New Social Risks in Old Welfare States 9. Recasting Wefare Regimes for a Postindustrial Era Bibliography

Abstract: The authors develop a model in which special-interest groups make political contributions in order to influence an incumbent government's choice of trade policy. The interest groups bid for protection with their campaign support. Politicians maximize their own welfare, which depends on total contributions collected and on the welfare of voters. The authors study the structure of protection that emerges in the political equilibrium and the contributions by different lobbies that support the policy outcome. They also discuss why the lobbies may in some cases prefer to have the government use trade policy to transfer income, rather than more efficient means. Copyright 1994 by American Economic Association.

Abstract: Among the developed countries it is not the richest societies which have the best health, but those which have the smallest income differences between rich and poor. Inequality and relative poverty have absolute effects: they increase death rates. But why? How can smaller income differences raise average life expectancy?Using examples from the USA, Britain, Japan and Eastern Europe, and bringing together evidence from the social and medical sciences, Unhealthy Socities provides the explanation. Healthy, egalitarian societies are more socially cohesive. They have a stronger community life and suffer fewer of the corrosive effects of inequality. As well as inequality weakening the social fabric, damaging health and increasing crime rates, Unhealthy Societies shows that social cohesion is crucial to the quality of life.The contrast between the material success and social failure of modern societies marks an imbalance which needs attention. The relationship between health and equality suggests that important social needs will go unmet without a larger measure of social and distributive justice. This path-breaking book is essential reading for health psychologists, sociologists, welfare economists, social policy analysts and all those concerned with the future of developed societies.