Insider Outsider Model –
Insider Outsider Model is a new approach about wage employment relationship. According to this approach, those who become unemployed as a result of fall in the aggregate demand resulting in recession in the economy lose their influence on the wage setting process and do not participate in wage negotiations with the employers because unemployed people lose their status as union members and therefore neither the employers nor the labour union care about them. As a result, while the unemployed workers would want firms to cut wages to create more jobs which would enable them to get beck employment but the forms ignore them and negotiate with the workers who have jobs and are members of unions.
It is quite expensive for the firms to often turnover the workers as costs have to be incurred for hiring new workers, training them and when not required retrenching them. Therefore, insiders have advantage over the outsiders who are seeking employment and it is difficult for the firms to cut wages of the insiders, especially if their labour union is strong.
Even if the workers accept cut in wages to retain their employment it may not be in the interest of the forms themselves to lower wages as it is likely to adversely affect the morale, effort and productivity of workers. Therefore the firms will think it better for them to deal with the insiders and pay them good wages even if there are unemployed workers outside who are eagerly seeking employment even at the lower wages.
The insider outsider model predicts that wages will not respond substantially to unemployment and that is another reason why we don’t quickly return to full employment once the economy experiences recession.
Some economists believe that the insider outsider model predicts an important explanation of the persistent high unemployment in some countries. This is because labour unions in some countries are quite strong and force the firms to bargain with the insiders and ignore the outsiders or the unemployed. This keeps the wages at high levels despite the existence of large unemployment in some countries. If the unions were not strong, the forms might like to hire the outsiders at lower wages and consequently reduce the unemployment.