Conventional economic theory deals primarily with `passive learning', whereby agents use any information they gain to make market decisions, but they do not make such decisions in order to acquire information. In Discussion Paper No. 483, Steve Alpern and Research Fellow Dennis Snower examine workers' use of wage claims to gain information about their own productivity by making wage claims and observing the resulting job offers. A job offer in response to a high wage claim clearly yields more information than the same offer in response to a lower claim.
In Alpern and Snower's model, each worker has a two-period working life and the actual value of his marginal revenue product (MRP) at a particular job is known to the firm but not to the worker. A `young' worker finding a vacancy makes a wage claim: if the firm makes a job offer, he knows that his MRP at least equal to his wage claim, and he makes a second wage claim as an `incumbent'. If he fails to find a job, he receives unemployment benefit in the first period and makes another claim as a `senior outsider'. If the worker's MRP when young is correlated with his MRP when older, then information gained in the first period may be valuable to him in formulating his second claim. A young worker therefore faces a trade-off: a high wage claim reduces his probability of getting a job in the first period, which reduces expected lifetime income; but it also raises his expected lifetime income if he does receive an offer, both by increasing his first-period income and by reducing uncertainty about his MRP, which increases second-period expected income.
Alpern and Snower find that there is more youth unemployment and more long-term unemployment under `learning by experience' than under passive learning and that increased uncertainty about productivity raises equilibrium unemployment. Youth unemployment exceeds that of senior outsiders, because some workers who were unemployed when young find vacancies as senior outsiders and because young workers have an incentive to make high wage claims to gain information and thereby run greater risks of having their wage claims rejected. Also, unemployment among senior outsiders exceeds that among incumbents, who have more information about their MRPs and can therefore make claims that run less risk of rejection than those of senior outsiders.
Such `learning from experience' may illuminate the labour market experience of various European countries in the wake of the oil price shocks of the 1970s, which initiated prolonged uncertainty regarding sales prospects, factor substitution and labour productivity. Workers may have perceived their productivities as uncertain but autocorrelated; while the high rates of unionization, pervasive job-security legislation and established bargaining procedures that characterize European labour markets enable workers to wield substantial market power, and these groups may have had a strong incentive to use their wage claims as a learning tool. In this way `learning by experience' may have played a role in generating the youth unemployment and long-term unemployment that characterized the recent recessions.

Unemployment through `Learning From Experience'
Steve Alpern and Dennis J Snower

Discussion Paper No. 483, December 1990 (IM)