Equilibrium unemployment as a worker insurance device. Wage setting in worker owned enterprises

Extending Shapiro and Stiglitz’s (1984) analysis of unemployment as a worker discipline device, we evidence how an economy populated by worker owned firms (WOFs), by overcoming information asymmetry on the employee side in the presence of employer opportunism (as embodied in moral hazard, hidden action and abuse of authority), can decrease, not increase equilibrium wages, while employment is necessarily higher in the presence of WOFs. Within the Shapiro and Stiglitz framework, our analysis evidences that the non-shirking constraint (NSC) for WOFs is lower for any employment and wage level than in investor owned firms (IOFs). By factoring bi-later asymmetric information and opportunism in the employment relation, our model implies that the Shapiro and Stiglitz (1984) results represent special cases in the wider analysis of equilibrium wages and employment in market economies. Relatedly, the potential for unemployment reduction and efficiency gain of worker ownership (as especially embodied in worker co-operatives, and employee-owned companies) has generally been understudied and empirical evidence coherent with this results need to be more thoroughly analysed