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CAN THE RISK‐SHIFTING EMPLOYMENT MODEL EXPLAIN FLUCTUATING EMPLOYMENT?
Author(s) -
MCDONALD IAN M.
Publication year - 1986
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1986.tb01795.x
Subject(s) - diagrammatic reasoning , simple (philosophy) , constraint (computer aided design) , economics , product (mathematics) , microeconomics , product market , econometrics , labour economics , computer science , mathematics , incentive , philosophy , geometry , epistemology , programming language
It is shown by numerical examples that, for the simple “two states of the world” version of Azariadis' original model of implicit labour contracts, enormous fluctuations in output price are required to generate layoffs. The paper then modifies the simple model, replacing the perfectly competitive product market specification with a sales constraint. This modification makes a significant difference; the combination of sales constraints and risk‐shifting is shown to have the potential to explain layoffs. Since this sales constraint is unmotivated by micro analysis, its inclusion does not satisfy the original aim of the risk‐shifting employment model to explain layoffs as based on micro foundations. A secondary aim of the paper is to make the workings of the risk‐shifting employment model easier to understand by introducing a new diagrammatic analysis based on a contract curve.