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

Wouter J. Den Haan and Petr Sedlacek

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: agency problem; welfare; permanent job loss (search for similar items in EconPapers)
JEL-codes: E24 E32 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2014-07
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (5)

Published in Quantitative Economics, July, 2014, 5(2), pp. 297 - 349. ISSN: 1759-7323

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Journal Article: Inefficient continuation decisions, job creation costs, and the cost of business cycles (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:59429

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