DP670 | The High Unemployment Trap

Author(s)

Publication Date

30/07/1992

JEL Code(s)

Keyword(s)

Programme Area(s)

Network(s)

Abstract

A model of the labour market under firing restrictions and endogenous quits is constructed. It is shown that in the spirit of Blanchard and Summers (1988), the model can generate multiple equilibria, with a low-quits/high-unemployment equilibrium coexisting with a high-quits/low-unemployment equilibrium. Under weak conditions, low-unemployment equilibria Pareto dominate high-unemployment equilibria. Mobility premia improve aggregate welfare but may increase unemployment.