Labor contracts in a model of imperfect competition

Varadarajan Chari, Larry Jones and Rodolfo Manuelli

No 117, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We propose a definition of involuntary unemployment which differs from that traditionally used in implicit labor contract theory. We say that a worker is involuntarily unemployed if the marginal wage implied by the optimal contract exceeds the marginal rate of substitution between leisure and consumption. We construct a model where risk-neutral firms have monopoly power and show that such monopoly power is necessary for involuntary unemployment to arise in the optimal contract. We numerically compute examples and show that such unemployment occurs for a wide range of parameter values.

Keywords: labor contracts; Unemployment; Wages (search for similar items in EconPapers)
Date: 1989
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Journal Article: Labor Contracts in a Model of Imperfect Competition (1989)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:117

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