Ranking and long-term unemployment in a model with efficiency wages

This chapter considers the long-run consequences of ranking job applicants on the basis of their unemployment durations by using a general equilibrium model, in which the wages paid by firms not only motivate their employees but also induce jobless workers to preserve their employability. Ranking and long-term unemployment become actual when the cost of establishing a new firm is so large that firms cannot pay high wages to their employees. By subsidizing newly established firms, the government can guide the economy to a more efficient equilibrium, in which every job seeker can find a new job by experiencing one period of unemployment, and thus firms’ distaste for the long-term unemployed is effectively nullified.