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Demand Uncertainty, Mismatch and (Un)Employment: A Microeconomic Approach

Author

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  • Jellal, Mohamed
  • Thisse, Jacques-François
  • Zenou, Yves

Abstract

We consider a finite number of firms, which compete imperfectly for heterogeneous workers. Firms produce a homogeneous good, sold on a competitive market, and face demand-induced price fluctuations. It is then shown that unemployment may arise in equilibrium because of both uncertainty of product demand and job mismatch. Unemployment does not arise, however, when the variance 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.

Suggested Citation

  • Jellal, Mohamed & Thisse, Jacques-François & Zenou, Yves, 1998. "Demand Uncertainty, Mismatch and (Un)Employment: A Microeconomic Approach," CEPR Discussion Papers 1914, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1914
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    Citations

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    Cited by:

    1. Hamilton, Jonathan & Thisse, Jacques-Francois & Zenou, Yves, 2000. "Wage Competition with Heterogeneous Workers and Firms," Journal of Labor Economics, University of Chicago Press, vol. 18(3), pages 453-472, July.
    2. Mohamed Jellal & François-Charles Wolff, 2005. "Free Entry under Uncertainty," Journal of Economics, Springer, vol. 85(1), pages 39-63, July.

    More about this item

    Keywords

    Demand Shock; job matching; Unemployment; workers' and firms' heterogeneity;

    JEL classification:

    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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