Holiday cheer...

Having been away on holiday for the last week, I find it necessary to post about all manner of exciting things.

However, my definition of exciting may be staggeringly different to yours, so be warned.

I am informed that the Danish unemployment benefit system is quite wonderful, as workers have a given stretch of time in which to find a job, and if they fail to do so they have to either accept one found for them by the state, or lose their unemployment benefit.

Now, I'll confess before going much further that I haven't read the relevant legislation, or indeed anything, really, about this, but I'll offer my criticisms nonetheless.

In the Shapiro-Stiglitz Shirking Model, workers must be paid 'efficiency wages'; these being wages above what we would normally expect in order to induce workers to, well, work. The degree of these efficiency wages is determined by the size of the workers' outside option; this being their expected income if they get caught not working and concurrently sacked, such that;

w* > U(B) + (1-u)w

Where w* is the wage paid to a worker in the firm at the moment, U is the probability of being unemployed if they are fired, (1-u) is the probability of them finding another job if they are fired, and w is the wage which that job will pay them.

Assuming that the market is in equilibrium, which is always fun, we can assume that;

w = w*, and hence that;

w* > U(B) + (1-u)w*

Given that 0 < u < 1, this forms an equilibrium characterised by involuntary unemployment; some people who want to get a job, cannot.

Under the Danish system, there is effectively no fear of unemployment; in the medium run, the probability of being unemployed is effectively 0, thus making our function;

w*> 0(B) + (1-0)w*
W* > w*

The above inequality is, tragically, completely impossible to obtain and hence, sadly, the Danish system cannot work in the medium run, at least not particularly well, assuming your goals are not to cause distortions. As a Conservative, I obviously favour the tried and testing technique of reducing unemployment benefits (B), and decreasing the amount that wages need t differ from the market clearing rate.

Whilst this is all mostly conjecture, and my stature as an economist should hardly wow anyone, there is an important conclusion here; some Unemployment is good for society; a Government that claims that it will eradicate unemployment is (a) lying and (b) stupid.