Employment and hours over the business cycle in a model with search frictions

Abstract

This paper studies a large-firm search-matching model with variable hours of work to investigate how firms utilize the intensive and extensive margins of labor adjustment over the business cycle. The model replicates the observed cyclical behavior of the Japanese labor market, in which fluctuations in hours of work account for 79 percent of the variations in total labor input, well. Introduction of variable hours of work introduces the Frisch elasticity parameter into the analysis, and this is a key determinant of the magnitude of fluctuations in hours of work.