The labor market and business cycle theories (Q1187675)

This monograph attempts to review and compare the old macroeconomic literature on business cycles with the new literature which emphasizes the microfoundations, rational expectations and nonlinearities through the labor market equations. Its major focus is on the wage-price equations in the labor market generating instability in the short, medium or long term. Its treatment of the new theory of business cycle comprises three major trends: (a) nonlinear deterministic labor market theories including bifurcation phenomena and chaos theory, (b) stochastic theory of business cycles which includes a review of Lucas' contribution, and (c) a regime switching model, when there occurs a fundamental change in behavior if a certain threshold is reached and discontinuity occurs. This discussion on the long run paradigm of business cycles starts from a generalized version of the nonlinear Goodwin model of growth, where instability is analyzed through limit cycles, phases of structural stability and discontinuity in a regime switching framework. The bifurcations in the growth paths are analyzed in various ways including a classification of three types of attractors in chaos theory, e.g., point attractors (equilibrium points), periodic attractors (limit cycles) and chaotic attractors. A set of simulation exercises is used to generate chaotic behavior in the Goodwin model.