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Implicit contracts, on-the-job search and involuntary unemployment

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  • Charles T. Carlstrom

Abstract

This paper extends the implicit contracts framework to allow for on-the-job search. It is shown that involuntary unemployment can arise in such a framework without placing any a priori restrictions on either wages or severance payments. The model also implies that firms will practice a two-tier system of adjusting their labor force. In the first stage, workers who receive outside job offers leave the firm. The second stage consists of firms hiring additional workers during good states of nature, and laying off workers during bad states of nature. Furthermore, during \"bad enough\" states of nature, firms will offer a severance payment or bonus for those who want to voluntarily leave, and then lay off workers without offering a large enough severance payment to compensate them for being unemployed.

Suggested Citation

  • Charles T. Carlstrom, 1987. "Implicit contracts, on-the-job search and involuntary unemployment," Working Papers (Old Series) 8712, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:8712
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    References listed on IDEAS

    as
    1. Oswald, Andrew J, 1986. "Unemployment Insurance and Labor Contracts under Asymmetric Information: Theory and Facts," American Economic Review, American Economic Association, vol. 76(3), pages 365-377, June.
    2. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-793, August.
    3. Kahn, Charles M, 1985. "Optimal Severance Pay with Incomplete Information," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 435-451, June.
    4. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
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