Answer to Question #65629 in Macroeconomics for Athira
Implicit contract theories propose the existence of quantity adjustments instead of price adjustments in the labor market. According to these theories firms can response to fluctuations in labor demand through layoffs and overtime. They offer implicit insurance (contracts) to employees against income uncertainty. Such contracts make workers to be less sensitive to income changes.
Insider-outsider theories recognize that employed workers (insiders) have some bargaining power. Such status of individuals who are currently working leads to different from competitive pattern of wages and employment. Senior workers may get effective insurance via contract while new hires don’t. Therefore, outsiders are less productive and lose their jobs.
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Various theries of unemploymet based on the possible response of the firm