ENDOGENOUS LABOR MARKET CYCLES

Authors：Li, Yunan; Wang, Cheng^*

Source：International Economic Review, 2022, 63(2): 849-881.

DOI：10.1111/iere.12553

• EQUILIBRIUM UNEMPLOYMENT
• FINANCIAL INTERMEDIATION
• MORAL-HAZARD
• BUSINESS
• MODELS

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.

• Institution
  复旦大学