Jump to ContentJump to Main Navigation
Show Summary Details
More options …

Open Economics

Editor-in-Chief: Schneider, Friedrich

1 Issue per year

Open Access
See all formats and pricing
More options …

The Shapiro-Stiglitz Model with Non-constant Marginal Utility

Joseph S. K. Wu / Chi Pui Ho
Published Online: 2017-09-06 | DOI: https://doi.org/10.1515/openec-2017-0003


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.

Keywords: Macroeconomics; Efficiency-Wage; S-shaped Effort Supply; Shirking model


  • Allgulin, M, Ellingsen, T., 2002. “Monitoring and Pay”, Journal of Labor Economics, 20: 201-216.CrossrefGoogle Scholar

  • Aloi, M, Lloyd-Braga T., 2010. “National labor markets, international factor mobility and macroeconomic instability”, Economic Theory, 43(3): 431-456.CrossrefGoogle Scholar

  • Altenburg, L., Brenken, A., 2008. “Effort, trade, and unemployment”, Canadian Journal of Economics, 41:864-893.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.CrossrefGoogle Scholar

  • Boeria, T., Jimeno, J. F., 2005. “The effects of employment protection: Learning from variable enforcement”, European Economic Review, 49: 2057-2077.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.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.Google Scholar

  • Davis, S.J. 2001. “The Quality Distribution of Jobs and the Structure of Wages in Search Equilibrium”, NBER Working Paper No. 8434.Google Scholar

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

  • Fuchs, W., 2007. “Contracting with Repeated Moral Hazard and Private Evaluations”, American Economic Review, 97(4):1432-1448.CrossrefGoogle 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.CrossrefGoogle 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.Google Scholar

  • Hendricks, W.E., Kahn, L.M. 1991. “Efficiency Wages, Monopoly Unions and Efficient Bargaining”, The Economic Journal, 101:1149-1162Google Scholar

  • Holzner, C., Meier, V., Werding, M., 2010. “Workfare, monitoring, and efficiency wages”, Journal of Macroeconomics, 32:157-168.CrossrefGoogle Scholar

  • Hoon, H.T., 2001. “Adjustment of wages and equilibrium unemployment in a Ricardian global economy”, Journal of International Economics, 54:193-209.CrossrefGoogle Scholar

  • Jellal, M., Zenou, Y., 1999. “Efficiency wages and the quality of job matching”, Journal of Economic Behavior & Organization, 39(2):201-217.CrossrefGoogle 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.CrossrefGoogle 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.Google Scholar

  • Lentz, R., 2009. “Optimal unemployment insurance in an estimated job search model with savings”, Review of Economic Dynamics, 12:37-57.Google Scholar

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

  • Meier, V., 2002. “Workfare in an efficiency wage model”, Empirica, 35:165-178.Google Scholar

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

  • Mortensen, D.T. 1970. “Job search, the duration of unemployment and the Phillips curve”, American Economic Review, 60(5):847-862.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.CrossrefGoogle 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-S149Google Scholar

  • Ose, S.O., 2005. “Working conditions, compensation and absenteeism”, Journal of Health Economics, 24:161-188.CrossrefGoogle Scholar

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

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

  • Pissarides, C.A., 1976. “Job Search and Participation”, Economica, New Series. 43:33-49CrossrefGoogle Scholar

  • Pries, M.J., 2004. “Persistence of Employment Fluctuations: A Model of Recurring Job Loss”, The Review of Economic Studies, 71(1):193-215.Google Scholar

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

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

  • Shimer, R., 2005. “The cyclical behavior of equilibrium unemployment and vacancies”, American Economic Review, 95 (1):25-49.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.CrossrefGoogle 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.CrossrefGoogle Scholar

  • Stähler, N., 2008. “Firing costs, severance payments, judicial mistakes and unemployment”, Labour Economics, 15(6):1162-1178.CrossrefGoogle Scholar

  • Stigler, G.J., 1961. “The economics of information”, Journal of Political Economy, 69 (3):213-225.Google Scholar

  • Stigler, G.J., 1962. “Information in the labor market”, Journal of Political Economy, 70 (5):94-105.CrossrefGoogle 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. 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.CrossrefGoogle Scholar

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

  • Strand, J., 1991. “Unemployment and Wages Under Worker Moral Hazard with Firm-Specific Cycles”, International Economic Review, 32(3):601-612CrossrefGoogle Scholar

  • Trigari, A., 2004. “Equilibrium Unemployment, Job Flows and Inflation Dynamics”, European Central Bank Working Paper No. 304.Google Scholar

  • Walsh, F., 1999. “A Multisector Model of Efficiency Wages”, Journal of Labor Economics, 17(2):351-376.CrossrefGoogle Scholar

  • Woodford, M., 1994. “Notes on Dynamic Efficiency Wage Models”, [Unpublished] Available from URL: http://www.columbia.edu/~mw2230/EfficiencyWages.pdfGoogle Scholar

  • Wu, J.S.K., Ho C.P., 2012. “Towards a more complete Efficiency-Wage Theory”, Pacific Economic Review, 17:660-676.CrossrefGoogle Scholar

  • Yang, H., 2008. “Efficiency Wages and Subjective Performance Pay”, Economic Inquiry, 46(2):179-196.CrossrefGoogle Scholar

  • Yashiv, E., 2007. “Labor search and matching in macroeconomics”, CEP Discussion Paper 803.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.CrossrefGoogle 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.CrossrefGoogle Scholar

About the article

Received: 2017-01-12

Accepted: 2017-07-12

Published Online: 2017-09-06

Published in Print: 2017-08-28

Citation Information: Open Economics, Volume 1, Issue 1, Pages 36–48, ISSN (Online) 2451-3458, DOI: https://doi.org/10.1515/openec-2017-0003.

Export Citation

© 2017. This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License. BY-NC-ND 4.0

Comments (0)

Please log in or register to comment.
Log in