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