Wage-Employment Contracts (Replaced by W0675)

This paper studies the efficient agreements about the dependence of workers' earnings on employment, when the employment level is controlled by firms. Under plausible assumptions, such agreements will cause employment to diverge from efficiency as a byproduct of their attempt to mitigate risk. However, employment is above rather than below the efficient level when the conditions of profitability are worse than average. Such a one- period implicit contracting model cannot, therefore, be used to "explain" unemployment as it is traditionally conceived.