Unemployment Creates Better Employees

We have recently been working on a paper that deals with the amount of effort that university faculty put into their jobs. This includes the effort that students see; class preparation, marking, office hours etc., and the effort that students don't see; committee work, research, professional development, conferences etc. One of the early papers on the topic of shirking is entitled "Equilibrium Unemployment as a Worker Discipline Device" by Carl Shapiro and Joseph E. Stiglitz published in the American Economic Review in June 1984.

"Shirking" refers to a situation whereby employees do not put in the effort required or expected from the employer. Employers can reduce the amount of shirking by employing managers to monitor employees and discipline or terminate the underperforming employee. This, however, can be expensive since managers expect to be paid and are not, themselves, productive.

Paying a wage rate that is above the equilibrium wage can reduce management costs. When a worker is terminated, they can get a new job at the equilibrium wage. This would be a reduction in pay. Because the cost of shirking is now borne in part by the shirker, less monitoring is required. The wage premium, or efficiency wage, depends on the equilibrium condition in the labour market. The closer the economy is to full employment, the higher the equilibrium wage and thus the higher is the efficiency wage.

Unemployment can reduce the efficiency wage. If employees can not immediately find alternate employment, then they will incur a cost if they are caught shirking. The deeper the recession and the longer the average length of unemployment, the lower the efficiency wage goes. This is the Shapiro/Stiglitz argument. Employees must increase their productivity if they want to keep their high wage jobs in times of recession.

This is the essence of an article we found in the Miami Herald. (Click here for article)