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Endogenous Labor Market Cycles

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  • Yunan Li
  • Cheng Wang

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.

Suggested Citation

  • Yunan Li & Cheng Wang, 2022. "Endogenous Labor Market Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(2), pages 849-881, May.
    • Handle: RePEc:wly:iecrev:v:63:y:2022:i:2:p:849-881
    DOI: 10.1111/iere.12553
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