Journal Article

Private Information, Wage Bargaining and Employment Fluctuations

John Kennan

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 77, issue 2, pages 633-664
Published in print April 2010 | ISSN: 0034-6527
Published online April 2010 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2009.00580.x
Private Information, Wage Bargaining and Employment Fluctuations

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Shimer (2005) pointed out that although we have a satisfactory theory of why some workers are unemployed at any given time, we don't know why the number of unemployed workers varies so much over time. The basic Mortensen–Pissarides model does not generate nearly enough volatility in unemployment for plausible parameter values. This paper extends the Mortensen–Pissarides model to allow for informational rents. Productivity is subject to publicly observed aggregate shocks, and to idiosyncratic shocks that are seen only by the employer. It is shown that there is a unique equilibrium, provided that the idiosyncratic shocks are not too large. The main result is that small fluctuations in productivity that are privately observed by employers can give rise to a kind of wage stickiness in equilibrium, and the informational rents associated with this stickiness are sufficient to generate relatively large unemployment fluctuations.

Journal Article.  12846 words.  Illustrated.

Subjects: Economics

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