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Shopping Externalities and Self-Fulfilling Unemployment Fluctuations

  • Greg Kaplan

    (Princeton University)

  • Guido Menzio

    (University of Pennsylvania)

We propose a novel theory of self-ful?lling ?uctuations in the labor market. A ?rm employing an additional worker generates positive externalities on other ?rms, 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 su¢ ciently strong to create strategic complementarities in the employment decisions of di¤erent ?rms and to generate multiple rational expectations equilibria. Equilibria di¤er with respect to the agents?(rational) expectations about future unemployment. We show that negative shocks to the agents?expectations lead to ?uctuations in vacancies, unemployment, labor productivity and the stock market that closely resemble those observed in the US during the Great Recession.

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Paper provided by Princeton University, Department of Economics, Center for Economic Policy Studies. in its series Working Papers with number 1461.

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Date of creation: May 2013
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Handle: RePEc:pri:cepsud:234kaplan
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