A Neoclassical Model of Unemployment and the Business Cycle

This paper investigates a general equilibrium model of unemployment and the business cycle in which specialization of labor plays a key role. A rational expectations equilibrium with ful ly flexible wages and prices can exhibit unemployment in which the ma rginal product of employed workers exceeds the reservation wage of th ose who are without jobs. Workers are unemployed either because they are in the process of relocating for a better job or because they are waiting for conditions in the depressed sector to improve. Moreover, seemingly small disruptions in the supplies of primary commodities s uch as energy could be the source of fluctuations in aggregate employ ment and can exert surprisingly large effects on real output. Copyright 1988 by University of Chicago Press.