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Firms' Labor Market Power and Aggregate Instability

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  • Nicolas Abad

    (CREAM - Centre de Recherche en Economie Appliquée à la Mondialisation - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - IRIHS - Institut de Recherche Interdisciplinaire Homme et Société - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université, UNIROUEN - Université de Rouen Normandie - NU - Normandie Université)

Abstract

This work proposes to study the emergence of aggregate instability, in the form of macroeconomic fluctuations due to the volatility of agents' expectations, caused by imperfect competition on the labor market. We consider that firms have some monopsony power which is introduced by a) considering that firms face a finite elasticity of labor supply, b) there is a finite number of firms operating under Cournot competition on the labor market. We show that given a free-entry and zero profit conditions, we obtain local indeterminacy when the elasticity of the sectoral labor supply is sufficiently low and factors are substitutable enough. We illustrate numerically our results with some empirical estimates for OECD countries and we conclude that expectation-driven fluctuations is obtained for plausible values.

Suggested Citation

  • Nicolas Abad, 2019. "Firms' Labor Market Power and Aggregate Instability," Working Papers hal-02329802, HAL.
    • Handle: RePEc:hal:wpaper:hal-02329802
    Note: View the original document on HAL open archive server: https://hal.science/hal-02329802
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    References listed on IDEAS

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    Keywords

    Monopsony power; local indeterminacy; expectation-driven business cycles;
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