Optimization Models in a Transition Economy by Ivan V. Sergienko Mikhail Mikhalevich & Ludmilla Koshlai

Author:Ivan V. Sergienko, Mikhail Mikhalevich & Ludmilla Koshlai
Language: eng
Format: epub
Publisher: Springer US, Boston, MA

where l is the labor capacity per unit of the newly created value added, ν is the demand for products, and α is the portion of the value added included in the unit value of the products.

Thus, the value of wage fund W established by the employer will be the solution of the optimization problem

(3.1)

for W ≥ 0, where .

The function F(W) is also continuous and concave under the mentioned assumptions. The point of its maximum will be , where W (1) is a solution of the equation and W (2) is determined from the relation . Here is the generalized (by Clark) derivative of function S(W). The point W = 0 could also be the solution of the problem (3.1), but this case could be avoided if we assume that the derivative of L s (W) function in zero point was sufficiently large, thus .

It should be noted that only one component W (1) of the solution W ∗, out of the two ones, depends on demand ν. Thus, in the case of a deep economic decline when the value of ν is decreased, the wage fund is also decreased, i.e., an absolute decline of employees’ level of life takes place. In the case of economic growth the wage fund will increase up to some limit defined by the point W (2). Further economic growth (an increase of ν) will be accompanied by a constant value of the total wage fund. The relative decline (in comparison with total demand) of employees’ incomes will be observed in this case. The dependence between the wage and demand will be nonlinear as a result of the effects mentioned above.

The above-considered model also allows us to account for the low level of unemployment in those transition countries experiencing a deep business depression. It is advantageous for a monopolist–employer to establish the wages, so that the labor supply is equal to the labor demand. A lower price of labor will not allow the monopsonic employer to fully obtain a feasible income, and a higher price will decrease the pure utility of labor consumption due to high labor purchase cost. Thus, there will be no extra labor force (i.e., unemployment in its classical understanding) on the labor market. Redundant labor will simply be ousted from the market due to low wages. Actually, there exists some unemployment that, first, is created by employer to force the employees to agree with low monopoly wages, second, is formed due to disagreement between the expected (used by employer for waging) and actual values of demand, and third, appears as frictional and structural unemployment. However, even taking into account the above-mentioned factors, the total level of unemployment will be considerably lower than the unemployment estimates obtained from the classical labor market models under the condition of a high rate of production decrease.

A further development of the suggested model will be a consideration of a dynamic system consisting of linear auto-correlation equation, which connects the values of demand and the wage fund, and the previously considered equality, which determines the wage fund through the demand.

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