Chapter 11: A Synthesis
11. A synthesis This book has been motivated by a desire to build a theory which is generalequilibrium in its approach but yet allows one to study how the economic forces that operate in the global economy aﬀect a nation’s long-term unemployment and wage performance. In undertaking this enterprise, the book makes a departure from the conventional treatment of unemployment in the international economics literature. By focusing on the determinants of the natural rate of unemployment, the theory places an emphasis on real (as opposed to monetary) factors in accounting for long-run movements in wages and unemployment. The theory is micro-foundation based, being built up from optimisation problems solved by decision-making workers and ﬁrms. The crucial new element that is introduced to standard fullemployment trade models is the informational asymmetric problem arising from the diﬃculty that ﬁrms have in monitoring the eﬀort levels of workers. In the absence of bonding solutions, due, say, to capital–market imperfections, ﬁrms use wages as an incentive device. In general equilibrium, endogenous job rationing arises. The incentive-compatible wage generally rises as the equilibrium rate of unemployment declines giving, in eﬀect, an upwardsloping wage curve in the employment rate–real wage plane. A demand– wage relation can be juxtaposed against the wage curve to determine the natural rate of unemployment, whose position in the Marshallian employment–wage diagram depends on the details of the production conditions and market structure. What are the principal lessons that have been derived from the analysis...
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