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A Neoclassical Model of Unemployment and the Business Cycle

James D. Hamilton
Journal of Political Economy
Vol. 96, No. 3 (Jun., 1988), pp. 593-617
Stable URL: http://www.jstor.org/stable/1830361
Page Count: 25
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A Neoclassical Model of Unemployment and the Business Cycle
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Abstract

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 fully flexible wages and prices can exhibit unemployment in which the marginal product of employed workers exceeds the reservation wage of those 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 such as energy could be the source of fluctuations in aggregate employment and can exert surprisingly large effects on real output.

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