Private Information, Wage Bargaining and Employment Fluctuations [report]

John Kennan
2006 unpublished
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
more » ... ks, 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.
doi:10.3386/w11967 fatcat:qdudk6xuunffxn2jkr6x5ifijm