Demand uncertainty, mismatch, and (un)employment
We consider a finite number of firms which compete imperfectly for heterogenous workers. Firms produce a homogeneous good sold on a competitive market and face demand-induced price fluc- tuations. It is then shown that unemployment may arise in equilibrium because of uncertainty on product demand and job mismatch. However, unemployment does not arise when the vari- ance of the demand shock is small enough and/or the cost of mismatch is sufficiently low. Full employment always prevails when there is free entry. Hence, unemployment may persist as long as the incumbent firms choose their skill requirements to protect their supranormal profits.
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"The European Unemployment Dilemma,"
Working Paper Series
481, Research Institute of Industrial Economics.
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"Wage competition with heterogeneous workers and firms,"
CORE Discussion Papers RP
-1463, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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NBER Working Papers
7282, National Bureau of Economic Research, Inc.
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