Hidden Unemployment

III. Involuntary Unemployment
Involuntary Unemployment occurs when a person is willing to work at the
prevailing wage yet is unemployed. Involuntary unemployment is distinguished from
voluntary unemployment, where workers choose not to work because their reservation
wage is higher than the prevailing wage. In an economy with involuntary unemployment
there is a surplus of labor at the current real wage. Involuntary unemployment cannot be
represented with a basic supply and demand model at a competitive equilibrium: All
workers on the labor supply curve above the market wage would voluntarily choose not
to work, and all those below the market wage would be employed. Given the basic
supply and demand model, involuntarily unemployed workers lie somewhere off of the
labor supply curve. Economists have several theories explaining the possibility of
involuntary unemployment including implicit contract theory, disequilibrium theory,
staggered wage setting, and efficiency wages.
Explanations
In the Shapiro-Stiglitz model workers are paid at a level where they do not shirk. This
prevents wages from dropping to market clearing levels. Full employment cannot be
achieved because workers would slack off if they were not threatened with the
possibility of unemployment. The curve for the no-shirking condition (labeled NSC) goes
to infinity at full employment.
Page 61 of 149