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Unemployment with Observable Aggregate Shocks

Sanford J. Grossman^1,2,3; Oliver Hart^1,4,5; Eric S. Maskin^4,6,7

¹ National Bureau of Economic Research · ² University of Chicago · ³ University of Pennsylvania · ⁴ Harvard University · ⁵ London School of Economics and Political Science · ⁶ Princeton University · ⁷ Massachusetts Institute of Technology

A general equilibrium model of optimal employment contracts is developed where firms have better information about labor's marginal product than workers. It is optimal for the wage to be tied to the level of employment, to prevent the firm from falsely stating that the marginal product is low and cutting the wage. It is shown that an observed aggregate shock that leads to an interindustry shift in labor demand and that would have no effect on total employment under symmetric information leads to a reduction in employment when firms and workers have asymmetric information.

DOI

10.1086/261193

Volume

91 (6)

Pages

907-928

Language

en

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BibTeX

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