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A Stochastic Monopsony Theory of the Business Cycle
Author(s) -
Holmes James M.,
Hutton Patricia A.
Publication year - 2005
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1093/ei/cbi014
Subject(s) - monopsony , economics , disequilibrium , business cycle , unemployment , involuntary unemployment , wage , efficiency wage , microeconomics , price setting , labour economics , rational expectations , macroeconomics , medicine , ophthalmology
Two distinct regimes, contractions and expansions, are generated in a model in which goods markets clear and all individuals are optimizing, strict wage and price takers, have fully rational expectations, and are heterogeneous in both preferences and resource endowments. Involuntary unemployment, asymmetric monetary policy effectiveness, and a changing relationship between real wages and employment over the business cycle are the result of optimizing behavior by monopsonistic, wage‐setting, and price‐taking firms faced with price uncertainty, an upward‐sloped supply of employees, and efficiency wage behavior. Disequilibrium and involuntary unemployment can occur at the level of the individual firm's labor market.