Equilibrium Unemployment as a Worker Screening Device

73 Pages Posted: 22 Apr 2004

See all articles by Barry J. Nalebuff

Barry J. Nalebuff

Yale University - Yale School of Management; Yale University - Cowles Foundation

Andrés Rodríguez-Clare

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: May 1993

Abstract

We present a model of the labor market with asymmetric information in which the equilibrium of the' market generates unemployment and job queues so that wages may serve as an effective screening device. This happens because more productive workers -- within any group of individuals with a given set of observable characteristics -- are more willing to accept the risk of being unemployed than less productive workers. The model is consistent with cyclical movements in average real wages as well as with differences in unemployment rates across different groups in the population. We also show that the market equilibrium is not, in general. constrained Pareto efficient Moreover. we identify a new category of nonexistence problems, different in several essential ways from those earlier discussed by Rothschild-Stiglitz [1976J and Wilson [1977]. We also extend the analysis to incorporate the possibility of renegotiation, showing that a separating-renegotiation-proof-equilibrium exists for certain parameters and that a renegotiation-proof equilibrium is always constrained Pareto efficient Finally, we present a version of the model in which firms enter sequentially, as in Guash and Weiss [1980]. But contrary to the main result in that paper, we show that there is no advantage of being late, provided workers have rational expectations.

Suggested Citation

Nalebuff, Barry and Rodríguez-Clare, Andrés and Stiglitz, Joseph E., Equilibrium Unemployment as a Worker Screening Device (May 1993). NBER Working Paper No. w4357. Available at SSRN: https://ssrn.com/abstract=227034

Barry Nalebuff (Contact Author)

Yale University - Yale School of Management ( email )

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Andrés Rodríguez-Clare

University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

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(212) 662-8474 (Fax)

HOME PAGE: http://www.josephstiglitz.com

National Bureau of Economic Research (NBER) ( email )

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