Employment cycles in search equilibrium

In this paper I present a stochastic dynamic model of the labor market in which workers search for job openings and firms for job candidates. I derive the existence of two stable steady states which give rise to stochastic cycles. The interaction of a productivity shock with the presence of two stable steady states generates equilibrium fluctuations in employment which are not optimal. A weak-convergence approximation technique is used in order to characterize the behavior of a nonlinear stochastic difference equation describing the equilibrium dynamics of the economy.