Fixed Wages, Layoffs, Unemployment Compensation, and Welfare.
HARVARD UNIV CAMBRIDGE MASS
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In a general equilibrium model with uncertain second period demand, incomplete markets, and costly labor mobility, the authors analyze the feasibility and optimality of alternative employment contracts. For the case where layoffs are prohibited, they demonstrate that both the fixed wage--constant employment contract, as well as the flexible wage--variable employment contract are equilibria in firm behavior, while the latter is preferable from societys point of view. In the case with layoffs, they show that the competitive mechanism leads to a less than optimal number of layoffs, and demonstrate that unemployment insurance with less than complete experience rating lowers the cost of layoffs to the firm and encourages labor mobility. In the context of the model, a properly designed unemployment insurance program yields a fully efficient allocation.
- Economics and Cost Analysis