Dual Labor Market and Endogenous Fluctuations

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 differentialleads to the occurrence of cycles of period two 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.Endogenous fluctuations ; dual labor market ; wage inequality ; efficiency wage