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Labor contracts in a model of imperfect competition

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  • V. V. Chari
  • Larry E. Jones
  • Rodolfo E. Manuelli

Abstract

We propose a definition of involuntary unemployment which differs from that traditionally used in implicit labor contract theory. We say that a worker is involuntarily unemployed if the marginal wage implied by the optimal contract exceeds the marginal rate of substitution between leisure and consumption. We construct a model where risk-neutral firms have monopoly power and show that such monopoly power is necessary for involuntary unemployment to arise in the optimal contract. We numerically compute examples and show that such unemployment occurs for a wide range of parameter values.

Suggested Citation

  • V. V. Chari & Larry E. Jones & Rodolfo E. Manuelli, "undated". "Labor contracts in a model of imperfect competition," Staff Report 117, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:117
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    References listed on IDEAS

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    1. V.V. Chari, 1980. "Involuntary Unemployment and Implicit Contracts," Discussion Papers 459, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Jones, Larry E & Manuelli, Rodolfo E, 1992. "The Coordination Problem and Equilibrium Theories of Recessions," American Economic Review, American Economic Association, vol. 82(3), pages 451-471, June.
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    6. Kahn, Charles M. & Green, Jerry, 1983. "Wage-Employment Contracts," Scholarly Articles 3203642, Harvard University Department of Economics.
    7. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    8. Gordon, Donald F, 1974. "A Neo-Classical Theory of Keynesian Unemployment," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 431-459, December.
    9. Martin S. Feldstein, 1975. "The Importance of Temporary Layoffs: An Empirical Analysis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(3), pages 725-745.
    10. Oliver D. Hart, 1983. "Optimal Labour Contracts under Asymmetric Information: An Introduction," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(1), pages 3-35.
    11. Dilip Mookherjee, 1986. "Involuntary Unemployment and Worker Moral Hazard," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(5), pages 739-754.
    12. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
    13. 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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    Cited by:

    1. Vesna Stavrevska, 2011. "The efficiency wages perspective to wage rigidity in the open economy: a survey," International Journal of Manpower, Emerald Group Publishing Limited, vol. 32(3), pages 273-299, June.

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