NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Private Information, Wage Bargaining and Employment Fluctuations

John Kennan

NBER Working Paper No. 11967
Issued in January 2006
NBER Program(s):   EFG

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.

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This paper was revised on July 13, 2007

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Document Object Identifier (DOI): 10.3386/w11967

Published: "Private Information, Wage Bargaining and Employment Fluctuations," Review of Economic Studies, 77, April 2010, 633-664. citation courtesy of

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