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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," The Review of Economic Studies, Review of Economic Studies Ltd, 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. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
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    6. John Kennan, 2001. "Uniqueness of Positive Fixed Points for Increasing Concave Functions on Rn: An Elementary Result," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 893-899, October.
    7. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
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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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