DP196 Cooperation, Harassment, and Involuntary Unemployment: An Insider-Outsider Approach

Author(s): Assar Lindbeck, Dennis J. Snower
Publication Date: September 1987
Keyword(s): Cooperation, Harassment, Insiders, Outsiders, Turnover, Unemployment, Wages
JEL(s): 023, 026, 821, 824
Programme Areas: Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=196

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 (i.e. "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.