ERIC Number: ED213808
Record Type: Non-Journal
Publication Date: 1981-Oct
Reference Count: N/A
Involuntary Unemployment Reconsidered: Second-Best Contracting with Heterogeneous Firms and Workers.
Nalebuff, Barry; Zeckhauser, Richard
The implicit contract theory, a new explanation for the phenomena of involuntary unemployment, does not capture the salient characteristics of real work employment. By building on implicit contract theory, this paper takes into account circumstances ignored in the traditional model: (1) institutional characteristics of the labor market enhance contracting possibilities by creating additional possibilities for commitments, and reduce or eliminate the problem of agencies; (2) workers vary in their preferences and in their levels of productivity across different firms; and (3) firms vary in the way the marginal productivity of labor is affected by the business cycle. The modified model presented in this paper assumes, therefore, that efficiency requires workers to switch among firms as business conditions change. Although unreliable information on base employments and layoffs may present limitations on contract, these limitations are generally overcome by the familiar labor market institutions of severance pay, pension and retirement benefits, and a lifetime income curve that rises more swiftly than productivity. The model's accuracy is tested by ten hypotheses about how labor markets function. (JCD)
Publication Type: Reports - Descriptive
Education Level: N/A
Sponsor: Department of Health and Human Services, Washington, DC.
Authoring Institution: Wisconsin Univ., Madison. Inst. for Research on Poverty.