Private Information, Wage Bargaining and Employment Fluctuations

Abstract

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.

Matching frictions, unemployment dynamics and the cost of business cycles

“…16 See for instance Hall (2005b), Hall and Milgrom (2008), Pissarides (2007), Hagedorn and Manovskii (2008), Hornstein et al (2007), Kennan (2006), Mortensen and Nagypal (2003), Silva and Toledo (2008) and Costain and Reiter (2008).…”

“…Hagedorn and Manovskii (2008) show that a higher parametrization for the utility of being unemployed and a lower bargaining power for workers enable the standard matching model to yield realistic fluctuations in the unemployment rate. Whereas Hornstein et al (2007) introduce investment-specific technological shocks, Kennan (2006) emphasizes the role of procyclical informational rents: the gain that firms obtain by being more informed than workers increases in booms. The inclusion of turnover costs (Pissarides (2007), Mortensen and Nagypal (2003) and Silva and Toledo (2008)) and match-specific technological change (Costain and Reiter (2008)) have also been investigated.…”

Measuring What Employers Do about Entry Wages over the Business Cycle: A New Approach

“…In keeping with the long macroeconomic tradition of accounting for large cyclical employment and unemployment fluctuations by assuming rigid wages, many recent theorists -such as Shimer (2004), Hall (2005), Hall and Milgrom (2008), Gertler and Trigari (2009), and Kennan (2010) -have suggested stickiness in real hiring wages as a way of modifying the Mortensen-Pissarides model to generate realistically large quantity fluctuations. Ultimately, however, whether this is the right way to go should be subject to empirical investigation.…”

Unemployment and Hours of Work: The North Atlantic Divide Revisited*

“…All three, however, suffer from the use of parameters that have no immediate counterpart in readily available data, so their quantitative impact cannot be fully ascertained. Kennan (2007) argues that if firms are subject to both idiosyncratic and aggregate shocks, the response of job creation to the aggregate shock is enhanced if the worker cannot observe the idiosyncratic shock. When idiosyncratic shocks are not observed the Nash solution to the wage bargain is not applicable, but Kennan considers a generalization to argue that although the wage rate reflects the aggregate shock as in the canonical model, it is set always under the assumption that the idiosyncratic component is low.…”