BAILY WAGES AND EMPLOYMENT intuitively clear. Both strategies S, and s, have the same constant employment path The difference in expected profits between the two is therefore given by E(TI|,)-E(I|S2)=2(1+r)"(E(w )-W)L, (10) which is the difference in the present value of wage costs. The two strategies must both yield the same expected utility for workers from condition(5). Since workers are risk averse, the non-stochastic wage w can be less than the expected value of the stochastic wage E(w). The firms costs are, therefore, lower and its expected profits higher. In the next section simultaneous employment and wage variations are dealt with, but in a somewhat different context. Instead of a single relative price changing, overal fuctuations in an economy are considered. IV, WAGES UNDER UNCERTAIN AGGREGATE DEMAND We now consider an economy where the price level and aggregate output fluctuate. The economy consists of M firms producing a single(composite) good with the same tech nology. Even though the general equilibrium framework (in which wages and profits feed back into aggregate demand)is not allowed for, the force of the result, it will be argued does not depend upon this Workers and producers are assumed to be uncertain about the level of aggregate demand over the future period t= 1,..., T. There is uncertainty about the actions of consumers or investors or the government or the foreign trade sector or some combination of these Producers, in turn, will react to changes in aggregate demand-leading to price and output movements. There is no very satisfactory theory of price and output dynamics in response to overall fluctuations. As long as prices do not respond fully and instantaneously then output will certainly fluctuate. seems to occur, at least in the short-run. Each producer has to guess what demand will be and how other producers will respond. He then forms expectations about the movements of output and the price level. Based upon these expectations each producer, as before, sets a strategy for wages and employment. This will in general, be conditional on the values of output and price that actually occur. The strategy then defines the distributions of wages(Wi1,.,Wir) and employment(Lil, . LIT)fc All firms operate under the same conditions with the same technology. For the purposes here, they differ only in scale. Consider first the properties of equilibria such that u firms adopt the same wage, employment and output strategy. 2 The results do not necessarily mean that this economy would actually reach or remain at such a point under competitive conditions. This question is examined subsequently The labour force consists of N workers who seek work over the periods t=l,..., T. Each firm sets the same wage and employment strategy over the period so that workers distribute themselves between firms to equalize the probability of employment at each firm ssumption 9. The probability of finding employment in period t is the same in each and is, hence, equal to the overall probability of employment q, given by L (11) fence we are dropping the assumption that each firm can sell all it wants at the going price. 3 Since the str ot matter here whether there are mobility costs and workers search only at time zero or whether there are no mobility costs and they can move freely in each