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Private Information, Wage Bargaining and Employment Fluctuations

  • John Kennan

Shimer (2005) pointed out that although we have a satisfactory theory of why some workers are unemployed at any given time, we don?t know why the number of unemployed workers varies so much over time. The basic Mortensen-Pissarides (1994) model does not generate nearly enough volatility in unemployment, for plausible parameter values. This paper extends the Mortensen-Pissarides model to allow for informational rents. Productivity is subject to publicly observed aggregate shocks, and to idiosyncratic shocks that are seen only by the employer. It is shown that there is a unique equilibrium, provided that the idiosyncratic shocks are not too large. The main result is that small fluctuations in productivity that are privately observed by employers can give rise to a kind of wage stickiness in equilibrium, and the informational rents associated with this stickiness are sufficient to generate relatively large unemployment fluctuations.

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File URL: http://www.nber.org/papers/w11967.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11967.

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Date of creation: Jan 2006
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Publication status: published as "Private Information, Wage Bargaining and Employment Fluctuations," Review of Economic Studies, 77, April 2010, 633-664.
Handle: RePEc:nbr:nberwo:11967
Note: EFG
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  1. Dale T. Mortensen, 2005. "More on Unemployment and Vacancy Fluctuations," 2005 Meeting Papers 326, Society for Economic Dynamics.
  2. Hagedorn, Marcus & Manovskii, Iourii, 2008. "The cyclical behavior of equilibrium unemployment and vacancies revisited," Working Paper Series 0853, European Central Bank.
  3. Kennan,J., 2001. "Uniqueness of positive fixed points for increasing concave functions on Rn : an elementary result," Working papers 2, Wisconsin Madison - Social Systems.
  4. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  5. Bjoern Bruegemann & Giuseppe Moscarini, 2006. "Asymmetric Information and Employment Fluctuations," 2006 Meeting Papers 215, Society for Economic Dynamics.
  6. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2005. "Unemployment and vacancy fluctuations in the matching model: inspecting the mechanism," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 19-50.
  7. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  8. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
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