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Federal Reserve Bank of Minneapolis
Staff Report
Labor contracts in a model of imperfect competition
V. V. Chari
Larry E. Jones
Rodolfo E. Manuelli
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.


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V. V. Chari & Larry E. Jones & Rodolfo E. Manuelli, Labor contracts in a model of imperfect competition, Federal Reserve Bank of Minneapolis, Staff Report 117, 1989.
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Keywords: Labor contract ; Unemployment ; Wages
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