New Information Theoretic Approaches to Labour Market Theory

The last decade or so has spawned a huge amount of literature on theoretical aspects of the labour market. Most of it has to do with problems of information either in the sense that incomplete information about what is going to happen or even about what is happening to the demand and supply conditions of firms influences labour contracts; or in the sense that firms’ incomplete information about their employees actual implementation of labour contracts influences employment strategies. The main strands of thought which I call information theoretic in this wide sense are the implicit or explicit contract theories of wages on the one hand, the efficiency wage literature on the other. I intend to review the salient features of these endeavours in my paper. Since surveys of various aspects of this literature abound, I shall review the most recent models from a very particular point of view: economists can no longer be accused of sidestepping the problem of unemployment in their work. In fact, in the last decade some of the most brilliant economic theoreticians in the profession have tried to explain unemployment. But in spite of much effort by the best brains, they have not succeeded. There is still no genuinely economic explanation of long-term involuntary unemployment at hand.