economic policy ; unemployment

We present a theory of involuntary unemployment which explains why the unemployed workers ("outsiders") are unable or unwilling to find jobs even though they are prepared to work for less than the prevailing wages of incumbent workers ("insiders"). The outsiders do not underbid the insiders since, were they to do so, the insiders would withdraw cooperation from them and make their work unpleasant (that is, "harass" them), thereby reducing the productivity and increasing the reservation wages of the underbidders. The resulting labor turnover costs create economic rent which the insiders tap in wage setting and, as a result, involuntary unemployment may arise.

The authors present a theory of involuntary unemployment which explains why the unemployed workers ("outsiders" ) are unable or unwilling to find jobs even though they are prepared to work for less than the prevailing wages of incumbent workers ("in siders"). The outsiders do not underbid the insiders since, were the y to do so, the insiders would withdraw cooperation from them, making their work unpleasant with harassment, and thereby reducing the prod uctivity and increasing the reservation wages of the underbidders. Th e resulting labor-turnover costs create economic rent which the insid ers tap in wage setting and, as a result, involuntary unemployment ma y arise.

The Caring Hand that Cripples: The East German Labor Market after Reunification by Dennis J. Snower and Christian Merkl. Published in volume 96, issue 2, pages 375-382 of American Economic Review, May 2006

This paper seeks to extend the domain of identity economics by exploring motivational foundations of in-group cooperation and out-group competition. On this basis, we explore the reflexive interaction between individual economic decisions and social identities in response to technological change in market economies. Our analysis explores how technological change falling on marketable goods and services, rather than non-market caring relationships, leads to a restructuring of identities, which increases the scope of individualism and promotes positional competition at the expense of caring activities. Since positional competition generates negative externalities while caring activities create positive ones, these developments have important welfare implications.