Labour Markets and Expectations

Abstract

Incorrect inflationary expectations affect the unemployment rate, hence the question of how expectations are formed is crucial. Examines two hypotheses which have dominated the discussion: the adaptive (AEH) and the rational expectations hypothesis (REH). During the 1980s it was assumed that REH was to be preferred to AEH, but various problems with REH have emerged. Focuses on two of these problems: whether participants in the labour market have the requisite information; and the presence of multiple RE equilibria. It may therefore be necessary for agents to co‐ordinate their expectations. Suggests that institutions of the labour market might hold the key to this question of co‐ordination.

Citation

Hargreaves Heap, S. (1993), "Labour Markets and Expectations", International Journal of Manpower, Vol. 14 No. 9, pp. 4-22. https://doi.org/10.1108/01437729310048245