Employment and wages with sector-specific shocks and worker moral hazard |
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Authors: | Jon Strand |
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Affiliation: | (1) Present address: Department of Economics, University of Oslo, Blindern, Box 1095, N-0317 Oslo, Norway |
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Abstract: | We study a model of worker moral hazard with identical workers and where sectoral prices are subject to stochastic shocks. When firms are short-run maximizers, employment is shown to be distorted downward relative to the case of certain prices, and more so the higher is the current price. This implies that employment is relatively insensitive to sectoral output-price changes, and that average employment and output are reduced when price volatility increases. When firms can commit to future employment levels, employment is greater in low-demand states (implying labor hoarding), and thus even less sensitive to shocks, while average employment is less distorted downward by uncertainty. The model gives a new explanation of how increased sector-specific volatility can lead to output losses, and of the possibility of negative comovements of unemployment and turnover. |
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Keywords: | efficiency wages business cycles unemployment JEL classification E32 J23 J41 J64 |
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