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Working Paper

Implicit Contracts, On-the-Job Search and Involuntary Unemployment

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This paper extends the implicit contracts framework to allow for on-the-job search. It is shown that involuntary unemployment can arise in such a framework without placing any a priori restrictions on either wages or severance payments. The model also implies that firms will practice a two-tier system of adjusting their labor force. In the first stage, workers who receive outside job offers leave the firm. The second stage consists of firms hiring additional workers during good states of nature, and laying off workers during bad states of nature. Furthermore, during "bad enough" states of nature, firms will offer a severance payment or bonus for those who want to voluntarily leave, and then lay off workers without offering a large enough severance payment to compensate them for being unemployed.
12.01.1987ISSN 2573-7953 WP 87-12

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Carlstrom, Charles T. 1987. “Implicit Contracts, On-the-Job Search and Involuntary Unemployment.” Federal Reserve Bank of Cleveland, Working Paper No. 87-12.