Working Paper: CEPR ID: DP196
Authors: Assar Lindbeck; Dennis J. Snower
Abstract: We present a theory of involuntary unemployment which explains why the unemployed workers ("outsiders") are unable or unwilling to find jobs even though they are prepared to work for less than the prevailing wages of incumbent workers ("insiders"). The outsiders do not underbid the insiders since, were they to do so, the insiders would withdraw cooperation from them and make their work unpleasant (i.e. "harass" them), thereby reducing the productivity and increasing the reservation wages of the underbidders. The resulting labor turnover costs create economic rent which the insiders tap in wage-setting and, as a result, involuntary unemployment may arise.
Keywords: unemployment; cooperation; harassment; insiders; outsiders
JEL Codes: 023; 026; 131; 821
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| insider cooperation (F55) | higher wages (J39) |
| insider cooperation (F55) | productivity relative to outsiders (O36) |
| outsiders underbidding (D44) | loss of cooperation (C71) |
| loss of cooperation (C71) | decrease in productivity (O49) |
| outsiders underbidding (D44) | increase in reservation wages of outsiders (J69) |
| increase in reservation wages of outsiders (J69) | involuntary unemployment (J64) |
| harassment by insiders (J81) | discourage outsiders from seeking employment (J68) |
| insider cooperation (F55) | firms prefer to retain insiders (L26) |