ABSTRACT
Heterogeneous agents are an uncomfortable fact of life in any macroeconomy, but in most markets differences in tastes or resource availability are expressed only as variations in quantities bought and sold. However, in the labor market, once we take account of the reservation wage, these differences lead to variations in economic rent while everyone works essentially the same number of hours. Moreover, firms adjust their labor input at the extensive margin rather than at the intensive margin, in a way that is largely predictable by those who are affected. Thus, labor-force participants face another source of heterogeneity: differences in the degree of security of employment or, in other words, variations in the risk of complete involuntary unemployment. Individual perceptions of job security, in turn, will lead to a potential conflict over wage demands between those with high security and those with little or no security. This conflict is the focus of this chapter.
