Layoff Unemployment, Risk Shifting, and Productivity*

This paper is concerned with the theory of implicit labor contracts. The implications of introducing hours worked or effort as an argument both in workers' utility functions (in addition to the wage rate) and in firms' production functions (in addition to the number of workers) are considered. It is shown that layoffs can occur at equilibrium in the absence of unemployment compensation and value of leisure, but only because of the inclusion of this additional variable.