Labor market volatility in a fully specified RBC search model: An analytical investigation

Abstract

I show that including a nonlinear production function with physical capital in the Diamond–Mortensen–Pissarides model lowers the elasticity of labor market tightness with respect to labor productivity by about 11.5% under the Hagedorn–Manovskii’s calibration. My finding is robust against different calibration techniques, as well as against different variants of real business cycle models with search-and-matching frictions. While the recent macroeconomics-labor literature focuses on the fundamental surplus to solve the Shimer puzzle, my analysis highlights the existence of an additional channel through which the nonlinearities implied by a production function with physical capital affect labor market volatility.