Abstract
A new microeconomic approach to the otherwise intractable problems of stagflation is developed. If social security contributions were proportional to hours worked, and if unemployment insurance were primarily supplied by firms, these will have an incentive to reduce hours rather than number of employees during recession, when long spells of unemployment are to be expected, with consequent high insurance costs to the firm. Such work-sharing would encourage wage and price restraint as all workers gain from returning to normal hours when the utility of extra leisure begins to decline. Reduction of the work force would take place when new jobs can be found quickly and social costs are minimized.
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