DP1914 Demand Uncertainty, Mismatch and (Un)Employment: A Microeconomic Approach

Author(s):	Mohamed Jellal, Jacques-François Thisse, Yves Zenou
Publication Date:	July 1998
Keyword(s):	Demand Shock, job matching, Unemployment, workers' and firms' heterogeneity
JEL(s):	I28, J41, L13
Programme Areas:	Industrial Organization, Human Resources
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=1914

We consider a finite number of firms, which compete imperfectly for heterogeneous workers. Firms produce a homogeneous good, sold on a competitive market, and face demand-induced price fluctuations. It is then shown that unemployment may arise in equilibrium because of both uncertainty of product demand and job mismatch. Unemployment does not arise, however, when the variance of the demand shock is small enough and/or the cost of mismatch is sufficiently low. Full employment always prevails when there is free entry. Hence, unemployment may persist as long as the incumbent firms choose their skill requirements to protect their supranormal profits.