Endogenous Labor Market Cycles

76 Pages Posted: 13 Oct 2018 Last revised: 13 Oct 2021

See all articles by Yunan Li

Yunan Li

City University of Hong Kong (CityU)

Cheng Wang

University of Iowa

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

Li, Yunan and Wang, Cheng, Endogenous Labor Market Cycles (October 12, 2021). Available at SSRN: https://ssrn.com/abstract=3251664 or http://dx.doi.org/10.2139/ssrn.3251664

Yunan Li (Contact Author)

City University of Hong Kong (CityU) ( email )

83 Tat Chee Avenue
Hong Kong

Cheng Wang

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

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