Labor Market Frictions Research Articles

The pro-competitive consequences of trade in frictional labor markets

What are the pro-competitive consequences of trade in frictional labor markets? This paper develops and estimates a dynamic general equilibrium trade model to show that the interplay between endogenously variable markups in product markets and frictions in labor markets has important implications for aggregate as well as distributional consequences of trade. In particular, I show that once markups are allowed to respond to trade liberalization, unemployment and residual wage inequality rise almost three times more than in a model with constant markups (in the steady state). The presence of labor market frictions makes the pro-competitive gains from trade liberalization negative.

Occupational reallocation within and across firms: Implications for labor market polarization

This study analyzes how labor market frictions interact with firms’ decisions to reallocate workers across different occupations during labor market polarization. We compare the patterns of occupational reallocation within and across firms in the US and Germany in recent years. We find within-firm reallocation contributes significantly to the decline in employment in routine occupations in Germany, but much less so in the US. We construct a general equilibrium model of firm dynamics and find the model with different firing taxes can replicate the difference in firm-level adjustment patterns across these countries. We conduct two counterfactual experiments for each country, highlighting the different roles played by the within-firm cost of reorganizing the occupational mix and across-firm frictions created by firing taxes. The results suggest the latter plays a more significant role in labor market polarization. Higher firing costs would lead to greater and faster polarization in the US.

Firms heterogeneity and intraindustry reallocation: Beyond dichotomous partitioning

AbstractThis paper studies the trade‐induced reallocation of resources beyond the conventional partition in trade models. It challenges the typical partition of firms into domestic‐only and trading entities. The paper demonstrates that reallocation across heterogeneous firms can occur without such dichotomous partitioning. For reallocation to happen, firms must have different exposure to international markets. The paper uses offshoring models with labor market frictions to illustrate this principle. The offshoring model reveals that labor market frictions induce variations in wage and offshoring intensity. These variations then lead to differential impacts from offshoring cost shifts, resulting in reallocation across heterogeneous firms without partition.

The impact of employee satisfaction on company's labour investment efficiency

This study examines the impact of employee satisfaction on company's labour investment efficiency (CLIE) using a sample of 2,333 company-year observations associated with 302 companies listed in the UK between 2008 and 2020. Arguments based on human relations theory suggest that satisfied employees are likely to be motived to exert greater efforts and exhibit lower turnover, thereby reducing employer's exposure to labour market frictions. In contrast, agency theory argues that satisfied employees may become entrenched and thus harm organisational outcomes, including CLIE. We measure satisfaction with employers across our sample companies using 164,341 employees' ratings posted on Glassdoor UK. We observe a positive impact of employee satisfaction on CLIE, demonstrating the validity of underlying human relations theory for the present business context characterised by labour shortages. We also find the positive impact of employee satisfaction on CLIE to be stronger for companies with higher labour intensity, more reliance on skilled labour, and more competitive industry environments. Our study contributes to research investigating the determinants of efficient investment in workforce. We also demonstrate the informational value of employee' online reviews for understanding a company's performance, particularly in assessing the efficiency of its employment decisions.

Furloughing Employees with Uncertain Return? Management of Labor Frictions and Inventory Under Demand Shock

We assess how a retailer can manage inventories and labor under an extreme condition such as a temporary negative demand shock due to a pandemic or an economic turmoil. This analysis incorporates labor market frictions whereby firms incur deadweight costs associated with hiring and firing employees, as well as the option to furlough labor. We examine the impact of these frictions on a retail firm's optimal operating policies around inventory level, furlough, and layoffs. We find that labor market frictions condition the inventory and the level of employment in two ways. First, they lead to underinvestment in inventories, which limits recovery and employment in the postshock period. Second, high labor market frictions motivate the firm to conservatively downsize workforce during the negative demand period leading to higher employment, when compared to downsizing without friction. A significant contribution of our study lies in delineating the optimal furlough decisions and quantifying the impact of the furlough option on inventory and labor decisions. We demonstrate the conditions under which it is optimal for the retailer to either (i) fully downsize labor and leverage the furlough option in the labor market, or (ii) maintain excess labor while also opting to furlough a portion of the workforce. During an extreme event such as a temporary negative demand shock, our results highlight the need for a coordinated effort when implementing governmental subsidy policies on alleviating labor and inventory reductions by accounting for labor market frictions and furlough support.

Wage employment, unemployment and self-employment across countries

Poor countries have low wage employment and high self-employment. This paper shows that they also have high unemployment relative to wage employment, and that self-employment increases with this ratio. To understand the sources of these patterns, I build a search and matching model with choice between job search and self-employment and with learning about matches, and calibrate it to match all transition rates between wage employment, unemployment and self-employment as well as separation hazards by job duration, separately for all 37 countries with available data. Quantitative analysis of the model shows that labor market frictions affect self-employment as much as unemployment. Labor market frictions also reduce aggregate output, not only by raising unemployment, but also by worsening the average quality of both wage employment matches and active self-employment projects.

Monetary Policy and Unemployment in Morocco: A DSGE Model Approach with Labor Market Frictions and Nash Wage Bargaining

Monetary Policy and Unemployment in Morocco: A DSGE Model Approach with Labor Market Frictions and Nash Wage Bargaining

Fiscal financing with labour markets frictions

AbstractIn this paper, we study the effect of search and matching frictions, i.e., equilibrium unemployment, on fiscal financing decisions in the United States. We build a Real Business Cycle model with labour market frictions and a rich set of fiscal tools and estimate the model using Bayesian methods on US data for various fiscal rule specifications. Most importantly, we find that the model with unemployment, output and debt in the fiscal rules fits the data best. Under the fiscal rule that best fits the data, the reaction of fiscal instruments to output and debt are significantly quantitatively different than a rule that ignores unemployment. Fiscal instruments react stronger to cyclical factors except transfers. These changes also affect model dynamics in response to fundamental non‐fiscal shocks.

Multidimensional heterogeneity and matching in a frictional labor market — An application to polarization

This paper examines the role that changes in production technology, namely computerization, have played on labor market inequality in the US from the late 1980s to the 2010s. It also demonstrates that such technological change is consistent with the timing of labor market polarization in the US, including the end of the decline in 50/10 wage percentile ratio and the slowdown of employment growth in high-wage jobs from the 2000s. The paper does so using a model with two key ingredients: 1) directed search and 2) two-sided multidimensional heterogeneity. Calibration results show that the complementarity between a workers’ cognitive skills and the cognitive task intensity of jobs increased while that between manual skill and tasks did not. The full model can fully account for the rise and fall of the 90/50 and 50/10 wage percentile ratios respectively. It also generates 72.6 percent of the rise in employment share of high-paying jobs relative to middling jobs and 69 percent of the fall in employment share of middling jobs relative to low-paying jobs. The paper suggests that the end of the decline in the 50/10 wage ratio may be due to rank-switching between workers across the wage distribution from the 2000s, while the slowdown of employment growth in high-wage jobs may result from the trade-off between the returns to applying for high-wage jobs and the likelihood of being hired.

Population aging, pensions, informality and labor market frictions in Lebanon. Reforms and policy choices

We evaluate the effects of population aging on the macroeconomic evolution of the Lebanese economy and the financial sustainability of its major pension schemes. We use an OLG model with labor market frictions as in de la Croix et al. (2013). Individuals are differentiated by their origin, age, gender, and education and choose the sector of activity, which implies that the size of the informal sector is endogenous. We assess the long-run implications of population aging and show that the public sector pension scheme is unsustainable. In contrast, the private sector scheme is insufficient to ensure decent living standards for the elderly. Finally, we evaluate the effects of two pension reforms. We first propose a mix of measures that guarantee the sustainability of the public sector scheme. Then, we evaluate the impact of the pension reform introduced in December 2023 and of an alternative reform aiming at increasing the size of the private sector scheme to improve the living standards for the elderly.

Offshoring, firm-level adjustment and labor market outcomes

This paper studies how the China shock affects unemployment rates and wage inequality across high-skilled and low-skilled workers in the United States, with particular emphasis on the dynamic and general equilibrium channels of firms' production locations and entry decisions. To shed light on the subject, I build a two-country trade-in-task model with firm heterogeneity, search-and-matching labor market frictions, and firms' endogenous selections into entry and offshoring. The model, consistent with evidence from vector autoregression analyses, uncovers important dynamics with implications for the impact of the China shock on U.S. worker inequality. Namely, it shows association between a decrease in offshoring costs and a short-lived increase in low-skilled unemployment in the source country, a longer-term decline in high-skilled unemployment, a transient expansion of the wage gap between high- and low-skilled workers, and an increase in firm entry.

Survey Data and Subjective Beliefs in Business Cycle Models

Abstract This paper develops a theory of subjective beliefs that departs from rational expectations, and shows that biases in household beliefs have quantitatively large effects on macroeconomic aggregates. The departures are formalized using model-consistent notions of pessimism and optimism which are supported by extensive time-series and cross-sectional evidence from household surveys. The role subjective beliefs play in aggregate fluctuations is quantified in a business cycle model with goods and labour market frictions. Consistent with the survey evidence, an increase in pessimism generates upward biases in unemployment and inflation forecasts and lowers economic activity. The underlying belief distortions reduce aggregate demand and propagate through frictional goods and labour markets. As a by-product of the analysis, solution techniques that preserve the effects of time-varying belief distortions in the class of linear solutions are developed.

Corporate social responsibility and labor investment efficiency: evidence from China

PurposeWe expect to provide a complete theoretical framework and large sample evidence on the impact of corporate social responsibility (CSR) on the efficiency of labor investment. We also hope to provide micro-evidence based on labor investment behavior for the two-sided impact of corporate CSR behavior.Design/methodology/approachThis paper measures labor investment efficiency by estimating the difference between actual and expected net hiring of enterprises. CSR is measured on the basis of the CSR score of Chinese listed companies published by Hexun.com. A regression model is constructed to analyze the relationship between CSR and labor investment efficiency. Possible endogeneity problems are controlled by lagging independent variables, propensity score matching method and difference-in-difference method.FindingsResults show that CSR can improve labor investment efficiency by reducing over-hiring and under-hiring in emerging markets. The existence of the mediating effect of agency cost, information disclosure quality and employment fluctuation confirms that CSR improves labor investment efficiency through two mechanisms of corporate governance and labor market friction. The improvement effect of CSR on labor investment efficiency is more significant in non-state-owned, high CEO shareholding ratio and high-average urban wage enterprises.Originality/valueIn conclusion, our study is an important supplement to the existing research on the factors affecting labor investment efficiency. Our research conclusions will be helpful for enterprises in developing countries or enterprises in labor-intensive industries to improve labor investment inefficiency. The conclusion of the mechanism analysis in this paper provides more complete and reliable microscopic evidence for accurately identifying the specific path of CSR's impact on labor investment efficiency. This paper verifies the positive impact of CSR from the perspective of labor investment efficiency in the context of a developing country, which provides evidence for the theoretical conflicts related to CSR based on the effectiveness of enterprise labor investment decisions.

Long-run consequences of informal elderly care and implications of public long-term care insurance

We estimate a dynamic structural model of labor supply, retirement, and informal caregiving to study short and long-term costs of informal caregiving in Germany. Incorporating labor market frictions and the German tax and benefit system, we find that in the absence of Germany’s public long-term insurance scheme, informal elderly care has adverse and persistent effects on labor market outcomes and, thus, negatively affects lifetime earnings and future pension benefits. These consequences of caregiving are heterogeneous and depend on age, previous earnings, and institutional regulations. Policy simulations suggest that while public long-term care insurance policies are fiscally costly and induce negative labor market effects, they can largely offset the personal costs of caregiving and increase welfare, especially for low-income individuals.

Heterogeneous Responses to Job Mobility Shocks in a HANK Model with a Frictional Labor Market

We use a heterogeneous agent New Keynesian model with a frictional labor market featuring on-the-job-search to study how job switching affects consumption decisions for individuals with different wealth levels. We find that an increased job switching rate, driven by an exogenous shift in employed individuals' job search efficiency—acting as a positive future income shock—results in a larger decline in current demand for the wealth rich relative to the wealth poor. This larger consumption reduction for the wealth rich is due to the equilibrium decline in their financial wealth.

The aggregate and distributional effects of fiscal stimuli

This paper compares the aggregate and distributional effects of three fiscal policy instruments: government expenditures, unemployment benefits, and transfers. To this end, the canonical model of frictional labor market is embedded into an otherwise standard incomplete markets framework where firms face price-adjustment costs. The model calibrated to match the moments characterizing the US economy successfully replicates the empirical distributions of households across: disposable income, consumption expenditures and net worth. The analysis quantifies the aggregate and distributional responses to changes in government expenditures, unemployment benefits, and transfers. Moreover, the stabilizing role of the analyzed fiscal measures is evaluated.

Trading Off Equality and Employment Gains in Sub-Saharan Africa

ABSTRACT This study examines the interaction of trade, inequality, and unemployment in Sub-Saharan Africa (SSA) from 1997 to 2021. Results from the mean group and pooled mean group estimation revealed that international trade explains a 6% rise in inequality and a 43% rise in unemployment. Our findings provide evidence that international trade, as currently structured, is not beneficial to SSA countries, despite the adoption of trade liberalization policies and regional trade agreements (RTAs). We argue that SSA countries could still derive gains from trade if they undertake massive structural reforms that address labor market frictions and skills gaps in the region.

Granular Search, Market Structure, and Wages

Abstract We develop a model of size-based market power in a frictional labour market. In the canonical search environment, competition for workers is encoded in outside options. In our granular setting, large employers remove their own job postings from their workers’ outside option. Thus, size gives market power and a more concentrated market structure depresses wages because it reduces competition for workers. We calibrate the model to Austrian data and find that such size-based market power depresses wages by about 2.6% or 1,500 euros annually per worker.

Explore or Exploit? Labor Market Frictions and the Innovation Choice

Explore or Exploit? Labor Market Frictions and the Innovation Choice

Labor Market Frictions and Firms' Build-Borrow-Buy Choices

Labor Market Frictions and Firms' Build-Borrow-Buy Choices