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Inefficient continuation decisions, job creation costs, and the cost of business cycles

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  • Wouter J. Den Haan
  • Petr Sedlacek

Abstract

This paper develops a model according to which the costs of business cycles are nontrivial because they reduce the average level of output. The reason is an interaction between job creation costs and an agency problem. The agency problem triggers separations during economic downturns even though both the employer and the worker would be better off if the job was not discontinued, that is, affected jobs have strictly positive surplus values. Similarly, booms make it possible for more jobs to overcome the agency problem. These effects do not offset each other, because business cycles reduce the expected job duration for these jobs. With positive job creation costs, business cycles then reduce the creation of valuable jobs and lower average activity levels. Considering a wide range of parameter values, we find estimates for the cost of business cycles ranging from 2.03% to 12.7% of gross domestic product.

Suggested Citation

  • Wouter J. Den Haan & Petr Sedlacek, 2014. "Inefficient continuation decisions, job creation costs, and the cost of business cycles," Quantitative Economics, Econometric Society, vol. 5, pages 297-349, July.
    • Handle: RePEc:wly:quante:v:5:y:2014:i::p:297-349
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    File URL: http://hdl.handle.net/10.1111/quan.2014.5.issue-2.x
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    Cited by:

    1. Krebs, Tom & Scheffel, Martin, 2016. "Labor Market Institutions and the Cost of Recessions," IZA Discussion Papers 10442, Institute of Labor Economics (IZA).
    2. Uroš Herman & Matija Lozej, 2023. "Who Gets Jobs Matters: Monetary Policy and the Labour Market in HANK and SAM," Working Papers halshs-04328572, HAL.
    3. Merlin, Giovanni Tondin, 2018. "Entrepreneurship, financial frictions and the welfare gains of business cycles," Textos para discussão 484, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    4. Alejandro Martín Danon & Rafael Tessone & Guido Zack, 2021. "Banca de Desarrollo en tiempos de pandemia. Evaluación de impacto de créditos de capital de trabajo," Asociación Argentina de Economía Política: Working Papers 4459, Asociación Argentina de Economía Política.
    5. Alejandro Danon & Rafael Tessone & Milena Valens Upegui, 2023. "Financing in times of crisis: lessons from the impact assessment of Banco Provincia's working capital credit line during the pandemic," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(82), pages 77-97, November.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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