Whether and why involuntary unemployment exists with persistence are issues of continuing debate. Advocates of the natural rate hypothesis deny that unemployment can be involuntary in models having rational agents, and favor structural reforms rather than discretional interventions in macroeconomic policies. Keynesians would not so readily dismiss the presence of involuntary unemployment: instead they seek out microeconomic explanations and consider appropriate remedies for each separate source of the “malaise.”

Straightforward microeconomic explanations of involuntary unemployment, though, are not so easy to come by. As it is well known, the Walras equilibrium concept precludes persistent involuntary unemployment, while search-theoretic explanations are usually identified with joblessness of a frictional and voluntary nature. Explanations involving labor turnovers (for example, wages are kept above equilibrium to help recruitment and discourage quitting) might also be regarded as frictional and not involuntary. Critics of the implicit contract model argue that the unemployment predicted is not only voluntary, but is also preventable by efficient contracts.

Other theories tracing inflexible, high wages to their beneficial effects on the morale and efforts of workers are confronted with the possibility that firms might adopt performance contracts (i.e., incentive wage systems), including the piece rate, to sidestep this issue altogether. The merits of the various arguments lie beyond our present scope.

The purpose of this paper is to observe that, in a principal-agent model with performance contracts, there may exist unemployment that is both persistent and involuntary in nature.