Working Paper: NBER ID: w2316
Authors: Richard Arnott; Arthur Hosios; Joseph Stiglitz
Abstract: Firms' inability to monitor their employees' search effort forces a tradeoff between risk-bearing and incentive considerations when designing employment-related insurance. Since the provision of insurance against firm-specific shocks adversely affects workers' incentives to find better jobs, the optimal contract provides only partial insurance: it prescribes low (high) wages and under (over) employment to encourage workers to leave (stay) at low (high) productivity firms; and it employs quits and layoffs as alternative means of inducing separations at low productivity firms, with the mix depending upon the relative efficiency of the on- and off-the-job search technologies. Our analysis of implicit contracts with asymmetric search information establishes that any consistent explanation for worksharing, layoffs, severance pay, quits and unemployment must focus on questions of labor mobility.
Keywords: implicit contracts; labor mobility; unemployment; employment insurance; search effort
JEL Codes: J23; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage rigidity (J31) | unemployment (J64) |
| wage rigidity (J31) | labor mobility (J62) |
| severance pay (J65) | workers' preferences regarding layoffs versus retention (J63) |
| firms' inability to monitor search efforts (D83) | trade-off between risk-bearing and incentive considerations (G32) |
| optimal contract prescribes low wages at low productivity firms (J41) | encourages workers to quit (J63) |
| high wages at high productivity firms (J31) | discourages quits (J63) |
| layoffs and quits (J63) | induce separations at low productivity firms (L19) |
| optimal implicit contract (D86) | leads to underemployment during bad economic times (J64) |
| firms lower wages to encourage quits (J63) | causal link between economic conditions and employment levels (J64) |