- Title
- Shopping Externalities and Self-Fulfilling Unemployment Fluctuations
- Author(s)
- Greg Kaplan Greg Kaplan (Princeton University)
- Guido Menzio Guido Menzio (University of Pennsylvania)
- Abstract
- We propose a novel theory of self-fulfilling fluctuations in the labor market. A firm employing an additional worker generates positive externalities on other firms, because employed workers have more income to spend and have less time to shop for low prices than unemployed workers. We quantify these shopping externalities and show that they are sufficiently strong to create strategic complementarities in the employment decisions of different firms and to generate multiple rational expectations equilibria. Equilibria differ with respect to the agents' (rational) expectations about future unemployment. We show that negative shocks to the agents' expectations lead to fluctuations in vacancies, unemployment, labor productivity and the stock market that closely resemble those observed in the US during the Great Recession.
- Creation Date
- 2013-05
- Section URL ID
- CEPS
- Paper Number
- 234
- URL
- https://gceps.princeton.edu/wp-content/uploads/2017/01/234kaplan.pdf
- File Function
- Jel
- J010, J200, J210, J600, J680
- Keyword(s)
- vacancies, unemployment, labor productivity, stock market, Great Recession
- Suppress
- false
- Series
- 3