A Simple Model of Raiding Opportunities and Unemployment

Torben Tranaes ()

No 96-01, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: This paper studies the impact of raiding opportunities in a competitive labor market where firms have complete information about the ability of employed workers but are incompletely informed regarding the ability of the unemployed. In equilibrium, some high-ability workers are involuntarily unemployed: unemployment is structural and too high. Moreover, in contrast to other models with wage-setting firms, wages are set so that employed workers strictly prefer equilibrium behavior. Finally, concerning the unemployment problem the paper focuses on the role played by the firms and reveals new insight into the effectiveness of requiring active search from people who claim unemployment benefits and of benefit reforms.

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