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Equilibrium Unemployment as a Worker Screening Device

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  • Barry Nalebuff
  • Andres Rodriguez
  • Joseph E. Stiglitz

Abstract

We present a model of the labor market with asymmetric information in which the equilibrium of the' market generates unemployment and job queues so that wages may serve as an effective screening device. This happens because more productive workers -- within any group of individuals with a given set of observable characteristics -- are more willing to accept the risk of being unemployed than less productive workers. The model is consistent with cyclical movements in average real wages as well as with differences in unemployment rates across different groups in the population. We also show that the market equilibrium is not, in general. constrained Pareto efficient Moreover. we identify a new category of nonexistence problems, different in several essential ways from those earlier discussed by Rothschild-Stiglitz [1976J and Wilson [1977]. We also extend the analysis to incorporate the possibility of renegotiation, showing that a separating-renegotiation-proof-equilibrium exists for certain parameters and that a renegotiation-proof equilibrium is always constrained Pareto efficient Finally, we present a version of the model in which firms enter sequentially, as in Guash and Weiss [1980]. But contrary to the main result in that paper, we show that there is no advantage of being late, provided workers have rational expectations.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4357.

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Date of creation: May 1993
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Handle: RePEc:nbr:nberwo:4357

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  1. Richard J. Arnott & Joseph E. Stiglitz, 1983. "Moral Hazard and Optimal Commodity Taxation," NBER Working Papers 1154, National Bureau of Economic Research, Inc.
  2. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 433-44, June.
  3. Guasch, J Luis & Weiss, Andrew, 1980. "Adverse Selection by Markets and the Advantage of Being Late," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 94(3), pages 453-66, May.
  4. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, American Economic Association, vol. 60(1), pages 126-42, March.
  5. Engers, Maxim & Fernandez, Luis F, 1987. "Market Equilibrium with Hidden Knowledge and Self-selection," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 425-39, March.
  6. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(2), pages 229-64, May.
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Cited by:
  1. Felipe Balmaceda, . "Compensation Methods in Competitive Labor Markets," ILADES-Georgetown University Working Papers, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines inv118, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  2. Asheim, G.B. & Nilssen, T., 1995. "Non-Discriminating Renogociation in a Competitive Insurance Market," Memorandum, Oslo University, Department of Economics 03/1995, Oslo University, Department of Economics.
  3. Bruce Greenwald & Joseph E. Stiglitz, 1987. "Money, Imperfect Information and Economic Fluctuations," NBER Working Papers 2188, National Bureau of Economic Research, Inc.

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