Wage Bargaining, Labor Turnover, and the Business Cycle: a Model with Asymmetric Information
25 Pages Posted: 4 Jul 2004 Last revised: 20 Sep 2010
Date Written: May 1984
This paper presents a wage bargaining model in which the employer and employee are each uncertain about the other's reservation wage. Under specified circumstances, the model's equilibrium is shown to involve unilateral wage setting and inefficient labor turnover. In addition, aggregate demand shocks affect the equilibrium in a way that produces procyclical quits and countercyclical layoffs.These results are obtained without resorting to assumptions of nominal wage rigidity, long-term contracting, or aggregate price misperceptions.
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