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Abstract.  This paper provides a model of involuntary unemployment by combining the insights of the sticky wage theory and the efficiency wage theory. It implies that employed workers tend to supply more effort in response to economic downturns. Thus, a negative shock to an economy has intriguing impacts on the unemployment. The model also shows that a negative demand shock may have a relatively small effect on output since changes in work effort serve to partially mitigate the effects of the shock. Moreover, it yields some implications that complement the existing 'work sharing' literature.

We design and field an innovative survey of unemployment insurance (UI) recipients that yields new insights about wage stickiness on the layoff margin. A majority of UI recipients would accept pay cuts of 5–10 percent to save their jobs, and one-third would accept a 25 percent cut. Yet worker-employer discussions about cuts in pay, benefits, or hours in lieu of layoffs are exceedingly rare. Roughly one-quarter of the layoffs in our sample violate the theoretical condition for bilaterally efficient separations. We draw on our findings and other evidence to assess theories of wage stickiness and its role in layoffs. (JEL C83, E24, J31, J63, J65)

This note sketches out the likely effects of a wage subsidy in a model of LDC which systematically incorporates an Informal sector. It is seen that the effects of a wage subsidy in this model differ considerably from those derived in the Harris‐Todaro‐type frameworks. Also, the ranking policies to improve welfare is likely to be considerably different in this model compared to this in the Harris‐Todaro‐type models.

An increase in the probability of work abroad, where the returns to schooling are higher than at home, induces more individuals in a developing country to acquire education, which leads to an increase in the supply of educated workers in the domestic labor market. Where there is a sticky wage-rate, the demand for labor at home will be constant. With a rising supply and constant demand, the rate of unemployment of educated workers in the domestic labor market will increase. Thus, the prospect of employment abroad causes involuntary 'educated unemployment' at home. A government that is concerned about 'educated unemployment' and might therefore be expected to encourage unemployed educated people to migrate will nevertheless, under certain conditions, elect to restrict the extent of the migration of educated individuals.