ENDOGENOUS LABOR MARKET CYCLES

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Journal / PublicationInternational Economic Review
Online published27 Oct 2021
Publication statusOnline published - 27 Oct 2021

Abstract

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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