Skip to content
BY-NC-ND 4.0 license Open Access Published by De Gruyter Open Access September 6, 2017

The Shapiro-Stiglitz Model with Non-constant Marginal Utility

  • Joseph S. K. Wu and Chi Pui Ho EMAIL logo
From the journal Open Economics


The Shapiro-Stiglitz model plays an important role in the employment theory. Woodford pointed out the theoretic limitation of the linear worker's utility function in that model. He questioned the model's implication of the secular decline in the unemployment rate when such rate was in fact trendless. He proposed to resolve this by allowing diminishing marginal utility of income. In this paper, the Shapiro- Stiglitz model is generalized using a nonlinear utility function implicit in the Stiglitz Efficiency-wage paper, thus linking these two well-known models. The nonlinear utility function in this generalized model not only allows for diminishing marginal utility of income but also allows for the analysis of parameters representing various factors affecting the secular unemployment rate. In particular, we can specify the condition under which the diminishing marginal utility can cause such rate to be trendless.


Allgulin, M, Ellingsen, T., 2002. “Monitoring and Pay”, Journal of Labor Economics, 20: 201-216.10.1086/338214Search in Google Scholar

Aloi, M, Lloyd-Braga T., 2010. “National labor markets, international factor mobility and macroeconomic instability”, Economic Theory, 43(3): 431-456.10.1007/s00199-009-0445-1Search in Google Scholar

Altenburg, L., Brenken, A., 2008. “Effort, trade, and unemployment”, Canadian Journal of Economics, 41:864-893.10.1111/j.1540-5982.2008.00489.xSearch in Google Scholar

Bertola, G, Caballero, R. J., 1994. “Cross-Sectional Efficiency and Labour Hoarding in a Matching Model of Unemployment”, The Review of Economic Studies, 61:435-456.10.2307/2297898Search in Google Scholar

Boeria, T., Jimeno, J. F., 2005. “The effects of employment protection: Learning from variable enforcement”, European Economic Review, 49: 2057-2077.10.1016/j.euroecorev.2004.09.013Search in Google Scholar

Boone, J., Bovenberg, L., 2004. “Optimal welfare and in-work benefits with search unemployment and observable abilities”, Journal of Economic Theory, 126:165-193.10.1016/j.jet.2004.09.001Search in Google Scholar

Brecher R.A., Chen Z. and Choudhri E.U., 2010. “A dynamic model of shirking and unemployment: Private saving, public debt, and optimal taxation”, Journal of Economic Dynamics & Control, 34:1392-1402.10.1016/j.jedc.2010.03.009Search in Google Scholar

Davis, S.J. 2001. “The Quality Distribution of Jobs and the Structure of Wages in Search Equilibrium”, NBER Working Paper No. 8434.10.3386/w8434Search in Google Scholar

Diamond, P.A. 1982. “Wage Determination and Efficiency in Search Equilibrium”, The Review of Economic Studies, 49(2):217-227.Search in Google Scholar

Fehr E., Kirchsteiger G., Riedl, A., 1996. “Involuntary Unemployment and Non-compensating Wage Differentials in an Experimental Labour Market”, Economic Journal, Royal Economic Society, 106:106-121.10.2307/2234934Search in Google Scholar

Fuchs, W., 2007. “Contracting with Repeated Moral Hazard and Private Evaluations”, American Economic Review, 97(4):1432-1448.10.1257/aer.97.4.1432Search in Google Scholar

Gertler, M., Sala, L., Trigari, A., 2008. “An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining”, Journal of Money, Credit and Banking, 40:1713-1764.10.1111/j.1538-4616.2008.00180.xSearch in Google Scholar

Hall, R.E. 2005. “Job Loss, Job Finding, and Unemployment in the U.S. Economy Over the Past Fifty Years”, NBER Working Paper No. 11678.10.3386/w11678Search in Google Scholar

Hendricks, W.E., Kahn, L.M. 1991. “Efficiency Wages, Monopoly Unions and Efficient Bargaining”, The Economic Journal, 101:1149-116210.2307/2234432Search in Google Scholar

Holzner, C., Meier, V., Werding, M., 2010. “Workfare, monitoring, and efficiency wages”, Journal of Macroeconomics, 32:157-168.10.1016/j.jmacro.2009.05.002Search in Google Scholar

Hoon, H.T., 2001. “Adjustment of wages and equilibrium unemployment in a Ricardian global economy”, Journal of International Economics, 54:193-209.10.1016/S0022-1996(00)00084-2Search in Google Scholar

Jellal, M., Zenou, Y., 1999. “Efficiency wages and the quality of job matching”, Journal of Economic Behavior & Organization, 39(2):201-217.10.1016/S0167-2681(99)00032-3Search in Google Scholar

Kiley, M.T., 1997. “Efficiency wages, nominal rigidities and the cyclical behavior of real wages and marginal cost”, Economics Letters, 56(2):215-221.10.1016/S0165-1765(97)81903-9Search in Google Scholar

Lehmann, E., Parmentier, A., Bruno, V.D.L., 2011. “Optimal income taxation with endogenous participation and search unemployment”, Journal of Public Economics, 95:1523-1537.10.1016/j.jpubeco.2011.05.012Search in Google Scholar

Lentz, R., 2009. “Optimal unemployment insurance in an estimated job search model with savings”, Review of Economic Dynamics, 12:37-57.10.1016/ in Google Scholar

McCall, J.J. 1970. “Economics of information and job search”, Quarterly Journal of Economics, 84(1):113-126.Search in Google Scholar

Meier, V., 2002. “Workfare in an efficiency wage model”, Empirica, 35:165-178.10.1007/s10663-007-9055-ySearch in Google Scholar

Moen, E.R. and Rosén, Å. 2006. “Equilibrium incentive contracts and efficiency wages”, Journal of the European Economic Association, 4: 1165-1192.Search in Google Scholar

Mortensen, D.T. 1970. “Job search, the duration of unemployment and the Phillips curve”, American Economic Review, 60(5):847-862.Search in Google Scholar

Mortensen, D. and Pissarides, C., 1994. “Job creation and job destruction in the theory of unemployment”, Review of Economic Studies, 61(3):397-415.10.2307/2297896Search in Google Scholar

Oi, W.Y., 1991. “Employment Relations in Dual Labor Markets (“It”s Nice Work If You Can Get It”)”, Journal of Labor Economics, 8(1): S124-S14910.1086/298247Search in Google Scholar

Ose, S.O., 2005. “Working conditions, compensation and absenteeism”, Journal of Health Economics, 24:161-188.10.1016/j.jhealeco.2004.07.001Search in Google Scholar

Phelps, E.S., 1994. Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interest, and Assets, Harvard University Press: Cambridge.Search in Google Scholar

Pissarides, C.A., 2000. Equilibrium Unemployment Theory (2nd Ed.), Cambridge (MA): MIT Press.Search in Google Scholar

Pissarides, C.A., 1976. “Job Search and Participation”, Economica, New Series. 43:33-4910.2307/2553014Search in Google Scholar

Pries, M.J., 2004. “Persistence of Employment Fluctuations: A Model of Recurring Job Loss”, The Review of Economic Studies, 71(1):193-215.10.1111/0034-6527.00281Search in Google Scholar

Salop, S.C., 1979. “A Model of the Natural Rate of Unemployment”, The American Economic Review, 69(1):117-125.Search in Google Scholar

Shapiro, C. and Stiglitz, J.E., 1984. “Equilibrium Unemployment as a Worker Discipline Device”, The American Economic Review, 74(3):433-444.Search in Google Scholar

Shimer, R., 2005. “The cyclical behavior of equilibrium unemployment and vacancies”, American Economic Review, 95 (1):25-49.10.1257/0002828053828572Search in Google Scholar

Skott, P., 2006. “Wage inequality and overeducation in a model with efficiency wages”, Canadian Journal of Economics, Canadian Economics Association, 39(1):94-123.10.1111/j.0008-4085.2006.00340.xSearch in Google Scholar

Sparks, R., 1986. “A Model of Involuntary Unemployment and Wage Rigidity: Worker Incentives and the Threat of Dismissal”, Journal of Labor Economics, 4(4):560-581.10.1086/298110Search in Google Scholar

Stähler, N., 2008. “Firing costs, severance payments, judicial mistakes and unemployment”, Labour Economics, 15(6):1162-1178.10.1016/j.labeco.2007.11.001Search in Google Scholar

Stigler, G.J., 1961. “The economics of information”, Journal of Political Economy, 69 (3):213-225.10.1086/258464Search in Google Scholar

Stigler, G.J., 1962. “Information in the labor market”, Journal of Political Economy, 70 (5):94-105.10.1086/258727Search in Google Scholar

Stiglitz, J.E., 1973. “Alternative theories of wage determination and unemployment in L.D.C.s: the efficiency wage model”, Cowles Foundation Discussion Paper, No. 357. Search in Google Scholar

Stiglitz, J.E., 1976. “The Efficiency Wage Hypothesis, Surplus Labour, and the Distribution of Income in L.D.C.s”, Oxford Economic Papers, New Series, 28(2):185-207.10.1093/oxfordjournals.oep.a041340Search in Google Scholar

Strand, J., 1987. “Unemployment as a Discipline Device with Heterogeneous Labor”, The American Economic Review, 77(3):489-493.Search in Google Scholar

Strand, J., 1991. “Unemployment and Wages Under Worker Moral Hazard with Firm-Specific Cycles”, International Economic Review, 32(3):601-61210.2307/2527109Search in Google Scholar

Trigari, A., 2004. “Equilibrium Unemployment, Job Flows and Inflation Dynamics”, European Central Bank Working Paper No. 304.10.2139/ssrn.515066Search in Google Scholar

Walsh, F., 1999. “A Multisector Model of Efficiency Wages”, Journal of Labor Economics, 17(2):351-376.10.1086/209924Search in Google Scholar

Woodford, M., 1994. “Notes on Dynamic Efficiency Wage Models”, [Unpublished] Available from URL: in Google Scholar

Wu, J.S.K., Ho C.P., 2012. “Towards a more complete Efficiency-Wage Theory”, Pacific Economic Review, 17:660-676.10.1111/1468-0106.12003Search in Google Scholar

Yang, H., 2008. “Efficiency Wages and Subjective Performance Pay”, Economic Inquiry, 46(2):179-196.10.1111/j.1465-7295.2007.00069.xSearch in Google Scholar

Yashiv, E., 2007. “Labor search and matching in macroeconomics”, CEP Discussion Paper 803.10.2139/ssrn.982166Search in Google Scholar

Zenou, Y., 2006. “Efficiency wages and unemployment in cities: The case of high-relocation costs”, Regional Science and Urban Economics, 36(1):49-71.10.1016/j.regsciurbeco.2005.06.001Search in Google Scholar

Zenou, Y. and Smith, T.E., 1995. “Efficiency wages, involuntary unemployment and urban spatial structure”, Regional Science and Urban Economics, 25(4):547-573.10.1016/0166-0462(95)02100-9Search in Google Scholar

Received: 2017-01-12
Accepted: 2017-07-12
Published Online: 2017-09-06
Published in Print: 2017-08-28

© 2017

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Downloaded on 10.6.2023 from
Scroll to top button