Unemployment and Wages under Worker Moral Hazard with Firm-Specific Cycles

Jon Strand

International Economic Review, 1991, vol. 32, issue 3, 601-12

Abstract: The author studies a model of efficiency wages due to worker moral hazard, where firms output prices shift between a high (H) and low (L) level. With no long-run wage commitments and identical treatment of workers, employment is cyclically rigid, and more so the shorter H periods are relative to L periods. When firms can commit to performance dependent wages, they instead prefer to first lay off young (untested) workers and pay them a lower initial wage, making employment more flexible. Private unemployment benefits are never paid to laid-off workers, even though temporary layoffs are never used to enforce effort. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1991
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