Demand Uncertainty, Mismatch and (Un)Employment: A Microeconomic Approach
CEPR Discussion Paper Series No. 1914
Posted: 2 Mar 1999
Date Written: July 1998
We consider a finite number of firms, which compete imperfectly for heterogeneous workers. Firms produce a homogeneous good, sold on a competitive market, and face demand-induced price fluctuations. It is then shown that unemployment may arise in equilibrium because of both uncertainty of product demand and job mismatch. Unemployment does not arise, however, when the variance of the demand shock is small enough and/or the cost of mismatch is sufficiently low. Full employment always prevails when there is free entry. Hence, unemployment may persist as long as the incumbent firms choose their skill requirements to protect their supernormal profits.
JEL Classification: I28, J41, L13
Suggested Citation: Suggested Citation