Abstract
AbstractIn the search‐and‐matching model, equilibrium indeterminacy obtains when wages respond strongly to a labor market tightening, and hiring is very elastic. We introduce two types of effort into such a model. Variable labor effort gives rise to short‐run increasing returns to hours in production. This amplifies profit expectations and firms' hiring incentives expanding the indeterminacy region. Variable search effort makes workers search more intensively in a tighter labor market. The procyclical nature of the resource cost of searching stabilizes firms' inclination to hire, shrinking the indeterminacy region. Indeterminacy disappears completely when vacancy posting costs are replaced with hiring costs.
Highlights
We introduce two types of effort, worker effort and search effort by job-seekers, into a simple search-and-matching model
As shown in the literature, indeterminacy can arise in the canonical labor search model when the price of a worker, i.e. the wage, increases strongly in response to firms’ vacancy posting and the ensuing tightening of the labor market
In addition to clarifying the mechanism leading to indeterminacy in the standard search model, we show how different calibration strategies alter the regions of indeterminacy in the two-dimensional parameter space spanned by the match elasticity and the bargaining share
Summary
We investigate how two types of effort, namely labor effort by the employed and search effort by the unemployed, affect existence and uniqueness of the equilibrium dynamics in an otherwise standard labor search-and-matching model ala Diamond-Mortensen-Pissarides, DMP (Pissarides, 2000). Equation (a) represents the definition of the unemployment rate; equation (b) the definition of the labor market tightness; equation (c) the definition of the job finding rate; equation (d) the definition of the probability of a vacancy being filled; equation (e) the law of motion for employment; equation (f) the matching function; equation (g) the optimality condition for hours; equation (h) the production function; equation (i) the aggregate resource constraint; equation (j) the vacancy posting condition; equation (k) the optimality condition for the bargaining wage; equation (l) the equilibrium search intensity; equation (m) the definition of labor disutility given the optimal effort choice; and equation (n) the definition of the search cost function. Unemployment, ut Tightness, θt Job finding rate, pt Vacancy filling rate, vt Employment, nt Matches, mt Hours, ht Production, yt GDP, Yt Vacancies, qt Wages, wt Search intensity, st Labor disutility, g(ht) Search cost, G(st).
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
