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Private Information, Wage Bargaining and Employment Fluctuations

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  • John Kennan

Abstract

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. Copyright , Wiley-Blackwell.

Suggested Citation

  • John Kennan, 2010. "Private Information, Wage Bargaining and Employment Fluctuations," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 633-664.
  • Handle: RePEc:oup:restud:v:77:y:2010:i:2:p:633-664
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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2009.00580.x
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    1. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2005. "Unemployment and vacancy fluctuations in the matching model: inspecting the mechanism," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 91(Sum), pages 19-50.
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    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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