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A Stochastic Monopsony Theory of the Business Cycle

  • James M. Holmes
  • Patricia A. Hutton

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. (JEL E32, E52, J41, J42) Copyright 2005, Oxford University Press.

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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 43 (2005)
Issue (Month): 1 (January)
Pages: 206-219

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Handle: RePEc:oup:ecinqu:v:43:y:2005:i:1:p:206-219
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