ENDOGENOUS LABOR MARKET CYCLES
Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › peer-review
Related Research Unit(s)
|Journal / Publication||International Economic Review|
|Online published||27 Oct 2021|
|Publication status||Online published - 27 Oct 2021|
|Link to Scopus||https://www.scopus.com/record/display.uri?eid=2-s2.0-85119173636&origin=recordpage|
We offer a new way of thinking about labor market fluctuations. In a perfectly stationary physical environment of the labor market, moral hazard and competition in long-term contracting generate cycles in market tightness, which may induce job creation and destruction, and two-period and longer cycles in wages and employment. Long-term contracts use termination as an incentive device. Underlying the cycles is an intertemporal negative externality. In prescribing a larger (smaller) probability of termination, each current period long-term contract puts pressure on all next period long-term contracts to prescribe a smaller (larger) probability of termination, by affecting the tightness of the market for long-term contracts in the next period.
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