Persistent Unemployment as Subgame Perfect Equilibrium

The present paper develops some game-theoretic models of a labour market with l firm and n equally productive workers. Although all agents are rational and well-informed, and each of them acts strategically in his own best interest (including the monopsonist firm), unemployment may persist in (subgame perfect) equilibrium for certain combinations of preferences and technology, if employment contracts are sufficiently short. This unemployment is involuntary in the traditional sense that in every period there are unemployed workers whose utility would be higher if employed at the going wage. The result is valid both when wages are set by the workers, and when they are set by the firm