Endogenous Labor Market Cycles
76 Pages Posted: 13 Oct 2018 Last revised: 13 Oct 2021
Date Written: October 12, 2021
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 a negative externality that each current period long-term contract's prescription of termination puts on all next period long-term contracts' prescription of termination by affecting the tightness of the market for long-term contracts in the next period.
Keywords: endogenous cycles, moral hazard, long-term contract, termination
JEL Classification: E32, D86
Suggested Citation: Suggested Citation