Working Paper: CEPR ID: DP1914
Authors: Jacques-François Thisse; Mohamed Jellal; Yves Zenou
Abstract: 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 supranormal profits.
Keywords: Workers and firms; Heterogeneity; Job matching; Demand shock; Unemployment
JEL Codes: J21; J41; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand uncertainty (D89) | unemployment (J64) |
| job mismatch (J68) | unemployment (J64) |
| demand uncertainty + job mismatch (J69) | unemployment (J64) |
| high variance of demand shocks (E39) | unemployment (J64) |
| high costs of mismatch (D29) | unemployment (J64) |
| low variance of demand shocks (E39) | no unemployment (J68) |
| low costs of mismatch (D29) | no unemployment (J68) |