Asymmetric Information and Employment Fluctuations

Shimer (2005) showed that a standard search and matching model of the labor market fails to generate fluctuations of unemployment and vacancies of the magnitude observed in US data in response to shocks to average labor productivity of plausible magnitude. He also suggested that wage determination through Nash bargaining may be the culprit. In this paper we pursue two objectives. First, we identify those properties of Nash bargaining that limit the ability of the model to generate a large response of unemployment and vacancies to a shock to average labor productivity. In light of these properties, cast in terms of a general model of wage determination, we reinterpret some of the specific solutions proposed so far to this problem. Second, we examine whether asymmetric information may help to violate those properties and to provide amplification. We assume that the firm has private information about the job's productivity, the worker about the amenity of the job, and aggregate labor productivity shocks do not change the distribution of private information around their mean. In this environment, we consider the monopoly (or monopsony) solution, namely a take-it-or-leave-it offer, and the constrained efficient allocation. We find that our key properties are satisfied for the first model essentially under all circumstances. They frequently (for commonly used specific distributions of beliefs) also apply to the constrained efficient allocation