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DUAL LABOR MARKET AND ENDOGENOUS FLUCTUATIONS

Published online by Cambridge University Press:  14 July 2005

FRANCESCO DE PALMA  and
THOMAS SEEGMULLER
FRANCESCO DE PALMA
Affiliation:
Louis Pasteur University
THOMAS SEEGMULLER
Affiliation:
CNRS and EUREQua
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Abstract

We study the influence of wage differential on the emergence of endogenous fluctuations. In this way, we introduce a dual labor market, based on the Shapiro–Stiglitz efficiency wage theory in an overlapping generations model. We show that wage inequality is a source of endogenous fluctuations. Indeed, a sufficiently strong wage differential leads to the occurrence of cycles of period 2 and local indeterminacy. Moreover, in contrast to several existing contributions, these results depend neither on increasing returns to scale nor on the degree of capital–labor substitution.

Keywords

Endogenous FluctuationsDual Labor MarketWage InequalityEfficiency Wage
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 9 , Issue 3 , June 2005 , pp. 398 - 411
Copyright
© 2005 Cambridge University Press

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