Business cycle phenomena of the labor market: The transactions cost approach to unemployment in general equilibrium

This dissertation creates a synthesis between the transactions cost approach to unemployment and the stochastic neoclassical growth model. A competitive labor market is replaced by one in which trade frictions and bilateral wage-bargaining matter. Specifically, job-worker matches form at rates determined by the workers' search and employers' recruiting activities where the division of the match surplus that provides the returns to these investments is determined as the outcome of a bilateral bargain. This new analytical environment permits a quantitative test of the qualitative implications that search theory has for aggregate economic variables. It also allows one to assess the theory's contribution to the explanation of business cycle phenomena that the standard model either has resolved in an unsatisfactory manner or has not addressed.;The first phenomenon addressed is the discrepancy between the microeconomic and macroeconomic evidence of the magnitude of the wage-elasticity of labor supply in connection with the dynamic correlation between hours worked and labor productivity. Introducing search for a job-match as another margin from which households can substitute into work increases the volatility between hours spent working and productivity. When job-matches become productive one period after they are formed, the model predicts that productivity leads hours over the cycle, and that their contemporaneous correlation is low.;Second, empirical evidence from the Bureau of Labor Statistic's data on labor turnover is presented which critically examines and improves on previously stated stylized facts on the cyclical behavior of labor turnover. It suggests that flows into unemployment fluctuate more than flows out of unemployment, and that both flows are countercyclical with inflows leading outflows. The analytical framework is extended by endogenizing firing decisions and by allowing for the recall of previously laid off workers in order to capture unemployment incidence and short unemployment spells. When job-matches vary in their idiosyncratic productivity, firms can temporarily lay off or recall workers which, together with new hires and permanent layoffs, helps explain the cyclical behavior of labor market flows.