Award Abstract #8721847
Microeconomic Foundations for a Real Theory of Employment Fluctuations

NSF Org:	SES Division of Social and Economic Sciences
Initial Amendment Date:	June 9, 1988
Latest Amendment Date:	January 11, 1990
Award Number:	8721847
Award Instrument:	Continuing grant
Program Manager:	James H. Blackman SES Division of Social and Economic Sciences SBE Directorate for Social, Behavioral & Economic Sciences
Start Date:	July 1, 1988
Expires:	December 31, 1990 (Estimated)
Awarded Amount to Date:	$91638
Investigator(s):	Edmund Phelps 212-280-2060 (Principal Investigator)
Sponsor:	Columbia University 2960 Broadway NEW YORK, NY 10027 212/854-6851
NSF Program(s):	ECONOMICS
Field Application(s):	0000099 Other Applications NEC, 82 Economics
Program Reference Code(s):
Program Element Code(s):	1320

ABSTRACT

This research seeks to develop microeconomic foundations for a real (that is, non-monetary) theory of employment variability in the business sector of market-type economies. The focus is on lay-offs under conditions of post-hire employee immobility, so that a worker values the protection of a "contract" when attaching himself to a firm. The first part of the research agenda tries to establish in a series of models a contractionary effect on employment resulting from shocks to the real interest rate or to the marginal efficiency of investment, that, in the two-sector models utilized, drive down capital goods' demand price in real terms (measured in terms of consumer goods). The second part of the research aims to show a contractionary employment effect from technological (or other) shocks generating a pause or slowdown of productivity-- thus a permanent setback to the "schedule" on which productivity advances. The problem, then, is to develop models of the optimal contract between employee and firm that will imply the hypothesized increase of unemployment (layoffs) from the above shocks-- preferrably a model that will imply the layoffs to be involuntary. To this end the projects will develop an incentive- compatible contract model that under-insures against layoffs and generates excess layoffs in adverse states. The last step is to work out explicitly the post-shock paths of employment when layoffs are thus determined. If successful, this new research on non-monetary models would offer an important supplement to the monetary theory of slumps constructed by Keynes and successors which do not account very well for "long swings" in employment and economic activity.

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