- Person
- Joseph Stiglitz
- Lived
- b. 1943
- Field
- Economics
- From
- American
The story
Economists long puzzled over why there is unemployment even in equilibrium. In the simplest market model, if more people want jobs than there are openings, job seekers should bid wages down until everyone who wants work finds it. Yet even without minimum wages, persistent unemployment is common. Joseph Stiglitz called understanding why the labour market does not clear one of his abiding concerns.
His interest went back to the summer of 1969, when he studied wage determination and unemployment in developing countries at the University of Nairobi. Over the following years he developed efficiency wage theories, which explain why it may pay firms to offer wages above the market-clearing level because the gain in productivity more than offsets the extra cost.
In 1984 Stiglitz and Carl Shapiro published 'Equilibrium unemployment as a worker discipline device' in the American Economic Review. Their answer to the puzzle was that unemployment is driven by the information structure of employment. Employers cannot perfectly observe how hard workers are trying, so they pay wages high enough to discourage shirking. The threat of losing a well-paid job is what keeps effort up, and that threat only works if some people are unemployed. As a result, wages do not fall far enough for everyone to be hired, and full employment cannot be reached.
The result became known as the Shapiro–Stiglitz model of efficiency wages. It questioned whether the standard neoclassical model could explain involuntary unemployment at all. Shapiro and Stiglitz showed that a familiar fact of working life could be understood with the tools of information economics.
The Nobel committee noted in 2001 that Stiglitz had shown asymmetric information to be key to understanding phenomena including unemployment. The model helped economists and policymakers see joblessness as a genuine market failure rather than simply a choice by workers, strengthening the case for policies that support people who want to work but cannot find a job.
Why it matters
The model helped economists and policymakers understand unemployment as a real market failure, not simply a choice by workers.
About Joseph Stiglitz
Nobel economist from Gary, Indiana, who showed how imperfect information distorts markets, led the World Bank’s research and became a leading critic of inequality.
More about Joseph Stiglitz
- Joseph Stiglitz named the Henry George theoremJoseph Stiglitz showed that the ideal supply of local public goods can be funded entirely by taxing the land rents those goods create, calling it the Henry George theorem.
- Joseph Stiglitz won a Nobel for the economics of informationJoseph Stiglitz shared the 2001 Nobel economics prize for showing how markets work when one side knows more than the other, including how insurers screen customers.
- Joseph Stiglitz marched for civil rights in 1963As student council president at Amherst, Joseph Stiglitz joined the March on Washington and organised an exchange with a small African-American college in the South.
- Joseph Stiglitz led a commission on measuring beyond GDPIn 2008 Joseph Stiglitz chaired the Commission on the Measurement of Economic Performance and Social Progress, whose 2009 report argued that GDP alone does not measure well-being.
- Joseph Stiglitz founded a think tank on developmentIn 2000 Joseph Stiglitz founded the Initiative for Policy Dialogue at Columbia University, and since 2005 he has chaired Manchester’s Brooks World Poverty Institute.
Sources
- Joseph Stiglitz Wikipedia
- The Prize in Economic Sciences 2001: press release NobelPrize.org
- Joseph E. Stiglitz: Biographical NobelPrize.org
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.