Editing Joseph Stiglitz (section)

===Shapiro–Stiglitz efficiency wage model===
{{Main|Shapiro–Stiglitz theory}}
{{See also|Efficiency wages}}
[[File:Efficiency wage Shapiro Stiglitz.svg|thumb|upright=1.5|In the [[Shapiro–Stiglitz model]] of efficiency wages, workers are paid at a level that dissuades shirking. This prevents wages from dropping to market clearing levels. Full employment cannot be achieved because workers would shirk if they were not threatened with the possibility of unemployment. Because of this, the curve for the no-shirking condition (labeled NSC) goes to infinity at full employment.]]

Stiglitz also did research on [[efficiency wages]], and helped create what became known as the "Shapiro–Stiglitz model" to explain why there is unemployment even in equilibrium, why wages are not bid down sufficiently by job seekers (in the absence of minimum wages) so that everyone who wants a job finds one, and to question whether the [[Neoclassical economics|neoclassical paradigm]] could explain [[involuntary unemployment]].<ref name = SHAPIROSTGLTZARTCL/>  An answer to these puzzles was proposed by [[Carl Shapiro|Shapiro]] and Stiglitz in 1984: "Unemployment is driven by the information structure of employment".<ref name=SHAPIROSTGLTZARTCL>{{cite journal | last1 = Stiglitz | first1 = Joseph E. | last2 = Shapiro | first2 = Carl | title = Equilibrium unemployment as a worker discipline device | journal = [[The American Economic Review]] | volume = 74 | issue = 3 | pages = 433–44 | publisher = [[American Economic Association]]  | date = June 1984 | jstor = 1804018 }}</ref> Two basic observations undergird their analysis:

# Unlike other forms of capital, humans can choose their level of effort.
# It is costly for firms to determine how much effort workers are exerting.

Some key implications of this model are:<ref>{{cite web|url=http://coin.wne.uw.edu.pl/lwincenciak/docs/lecture_4.pdf|title=Lecture 4|date=May 22, 2007|website=coin.wne.uw.edu.pl|access-date=March 16, 2008|archive-url=https://web.archive.org/web/20110715112948/http://coin.wne.uw.edu.pl/lwincenciak/docs/lecture_4.pdf|archive-date=July 15, 2011|url-status=dead}}</ref><ref name=SHAPIROSTGLTZMATH>{{cite web |url=http://coin.wne.uw.edu.pl/lwincenciak/docs/lecture_4.pdf |title=Efficiency wages, the Shapiro-Stiglitz Model |access-date=October 29, 2013 |archive-url=https://web.archive.org/web/20110715112948/http://coin.wne.uw.edu.pl/lwincenciak/docs/lecture_4.pdf |archive-date=July 15, 2011 |url-status=dead }}</ref>

# Wages do not fall enough during recessions to prevent unemployment from rising. If the demand for labor falls, this lowers wages. But because wages have fallen, the probability of 'shirking' (workers not exerting effort) has risen. If employment levels are to be maintained, through a sufficient lowering of wages, workers will be less productive than before through the shirking effect. As a consequence, in the model, wages do not fall enough to maintain employment levels at the previous state, because firms want to avoid excessive shirking by their workers. So, unemployment must rise during recessions, because wages are kept 'too high'.
# Possible corollary: Wage sluggishness. Moving from one private cost of hiring (w∗) to another private cost of hiring (w∗∗) will require each firm to repeatedly re-optimize wages in response to shifting [[Unemployment|unemployment rate]]. Firms cannot cut wages until unemployment rises sufficiently (a coordination problem).

The outcome is never [[Pareto efficiency|Pareto efficient]].

# Each firm employs too few workers, because the cost of employing too many workers would be faced by the firm alone, while the cost of unemployment is shared by the firm and its competitors, indeed it is shared by all firms that pay taxes in the country. This means that firms do not "internalize" the "external" cost of unemployment{{snd}} they do not factor how large-scale unemployment harms society when assessing their own costs.  This leads to a negative externality as marginal social cost exceeds the firm's marginal cost (MSC = Firm's Private Marginal Cost + Marginal External Cost of increased social unemployment){{Clarify|date=January 2010}}
# There are also [[Externality|positive externalities]]: each firm increases the asset value of unemployment for all other firms when they hire during recessions.  By creating hypercompetitive labor markets, all firms (the winners when laborers compete) experience an increase in value.  However, this effect of increased valuation is very unapparent, because the first problem (the negative externality of sub-optimal hiring) clearly dominates since the 'natural rate of unemployment' is always too high.