Labor Market Frictions Research Articles

The effect of credit shocks in the context of labor market frictions

The recent financial crisis was associated with a large and prolonged deterioration of the credit supply. I build and calibrate a structural model to explore the impact of credit-supply shocks on firm behavior in the context of labor market frictions. I discover that (i) a negative shock to the credit supply can lead to a protracted depression in business activities when firms have a steady level of productivity (demand) and that (ii) a reduction of labor adjustment costs can improve investment and mitigate the negative impact of credit-supply shocks, especially for firms with a high level of productivity. I also empirically corroborate that a lower labor unionization rate can mitigate the negative impact of supply shocks on high-demand firms during a crisis.

Does public sector employment buffer the minimum wage effects?

This paper studies the impact of a minimum wage policy in a labor market with a private and a public sector. We develop a two-sector search and matching model with minimum wage and heterogeneous workers in their human capital. We structurally estimate the model using data for Chile, a country with a large fraction of employment in the public sector and a binding minimum wage. Counterfactual analysis shows that institutional features of public sector employment reduce labor market frictions and mitigate the negative effect of the minimum wage on unemployment and welfare.

Trade, technology, and the labour market: impacts on wage inequality within countries

This paper focuses on the widening wage inequality between skilled and unskilled workers within countries and discusses whether trade and technology have contributed to this trend. The paper develops an analytical framework for wage inequality that traces the determinants and their relative roles in wage inequality in different stages of the development of trade theory, especially those considering new evidence after 2011. We find that technology plays a key role in the rise of wage inequality in most countries, while trade plays an increasingly crucial and more complex role in recent years. Skill supply institutions, such as education systems supplying skilled labour or unions participating in wage‐setting processes, suppress the rise of wage inequality in some countries. The paper further outlines the mechanisms through which trade affects wage inequality, including offshoring, firm heterogeneity, labour market frictions and global value chains. We find that trade has indirect effects on technology, which further enlarges the wage inequality among skills. The paper also discusses the policy implications of the impacts of trade and technology on wage inequality.

Skilled Labor Mobility and Firm Value: Evidence from Green Card Allocations

Abstract This paper studies how the labor market frictions of skilled workers affect corporate valuation. The analysis features immigrant workers’ mobility constraints imposed by the U.S. green card application process and exploits exogenous variations caused by imperfections in the current immigration system. The study finds that relaxing mobility constraints negatively influences firm value. This effect is stronger for firms with higher labor adjustment costs. Reductions in investments and increases in labor costs are channels through which labor mobility adversely affects firm value. The findings suggest that monopoly rent over skilled workers is an important economic determinant of corporate valuation.

Globalization, Trade Imbalances and Labor Market Adjustment

<ns2:p>We study the role of global trade imbalances in shaping the adjustment dynamics in response to trade shocks. We build and estimate a general equilibrium, multi-country, multi-sector model of trade with two key ingredients: (a) Consumption-saving decisions in each country commanded by representative households, leading to endogenous trade imbalances; (b) labor market frictions across and within sectors, leading to unemployment dynamics and sluggish transitions to shocks. We use the estimated model to study the behavior of labor markets in response to globalization shocks, including shocks to technology, trade costs, and inter-temporal preferences (savings gluts). We find that modeling trade imbalances changes both qualitatively and quantitatively the short- and long-run implications of globalization shocks for labor reallocation and unemployment dynamics. In a series of empirical applications, we study the labor market effects of shocks accrued to the global economy, their implications for the gains from trade, and we revisit the "China Shock" through the lens of our model. We show that the US enjoys a 2.2 percent gain in response to globalization shocks. These gains would have been 73 percent larger in the absence of the global savings glut, but they would have been 40 percent smaller in a balanced-trade world.</ns2:p>

Fiscal devaluation and labor market frictions in a monetary union

We evaluate the macroeconomic and labor market impact of a fiscal devaluation in one region of a monetary union. We simulate a monetary-union model of the euro area (EA) and the world economy featuring search-and-matching labor markets. We obtain the following results. First, a region-specific devaluation improves trade-competitiveness, macroeconomic conditions, and employment. Second, a permanent regional fiscal devaluation has more expansionary labor-intensive effects than lowering the capital income tax rate and increasing the consumption tax rate. Third, simultaneous EA-wide and world-wide fiscal devaluations have expansionary effects on macroeconomic and labor market conditions. Fourth, a EA accommodative monetary policy enhances the expansionary effects of the EA-wide fiscal devaluation on the generic Member State; to the opposite, the Member State faces lower economic activity and employment if the world-wide fiscal devaluation is accompanied by an accommodative monetary stance outside the EA.

A new Keynesian model with unemployment: The effect of on‐the‐job search

AbstractAlthough new Keynesian models with labor market frictions report an increase in unemployment and a decrease in labor market tightness in response to a positive technology shock, which appears to be in line with recent empirical findings, the volatilities of these variables are not as high as their empirical counterparts. This calls for the introduction of new modeling tools to amplify the volatilities of the unemployment rate and labor market tightness. Along this line, this paper contributes to the theoretical literature by studying the effect of employment‐to‐employment flow in a new Keynesian model with labor market frictions. We consider two types of firms that offer different wage levels, which incentivize low‐paid agents to search on the job. Differently from the existing literature, the main source of wage dispersion is the difference between firms' bargaining powers. The proposed model generates a higher volatility of unemployment and labor market tightness in response to a positive technology shock compared to the model without on‐the‐job search, without causing a significant change in the responses of other variables.

Labor market frictions, capital, taxes and employment.

This paper studies the role of the tax on mobile capital in labor markets with matching frictions and the effects of such frictions on inefficiency of capital taxation. Firms acquire capital and create vacancies, and workers apply for firms. Due to matching frictions, vacancies may not be filled, and workers may not be employed. Firms’ investment in capital, wages and market tightness are determined in a way that a firm’s profit and a worker’s utility are jointly maximized. In addition, the return to capital net of the tax is equalized across jurisdictions, as capital moves between jurisdictions. An increase in the capital tax of a jurisdiction alters firms’ capital investment, wages and market tightness of the jurisdiction. In particular, it decreases employment and wages of the jurisdiction, providing an explanation for why policymakers of a jurisdiction provide incentives such as tax cuts for mobile capital. More capital increases the wages only when workers are employed and hence have higher incomes, decreasing the benefit of more capital for risk-averse workers and reducing the incentives of a jurisdiction to lower the tax and attract capital. The equilibrium capital tax thus may be too low or too high relative to the efficient level, and capital is taxed even with the head tax.

Labor Market Dynamics When Ideas are Harder to Find

This paper evaluates the impact of slowing economic growth on labor market dynamism and misallocation. It provides a model of endogenous growth via imitation in a frictional labor market. The framework accounts for rich data on worker job-to-job transitions as well as stochastic and lifecycle properties of firm growth and job reallocation. High productivity entrants gradually replace obsolescing incumbents by poaching their workers, a process that is intermediated via a frictional labor market. When the likelihood of entrants imitating technologies in the tail of the distribution falls (ideas are harder to find), so does growth. Consistent with US data over the past 30 years, firm entry, incumbents’ employment response to productivity shocks, and job-to-job transitions decline, while the share of old firms increases. With lower imitation, however, there is less misallocation, because the slower aggregate rate of obsolescence induces productive firms to invest more in costly hiring and grow faster to their optimal size. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Short-Time Work and Precautionary Savings

In the Covid-19 crisis, most OECD countries use short-time work schemes (subsidized working time reductions) to preserve employment relationships. This paper studies whether short-time work can save jobs through stabilizing aggregate demand in recessions. We build a New Keynesian model with incomplete asset markets and labor market frictions, featuring an endogenous firing as well as a short-time work decision. In recessions, short-time work reduces the unemployment risk of workers, which mitigates their precautionary savings motive and aggregate demand falls by less. Using a quantitative model analysis, we show that this channel can increase the stabilization potential of short-time work over the business cycle up to 55%, even more when monetary policy is constrained by the zero lower bound. Further, an increase of the short-time work replacement rate can be more effective compared to an increase of the unemployment benefit replacement rate.

Labor and Product Market Reforms and External Imbalances: Evidence from Advanced Economies

We explore the impact of major labor and product market reforms on current account dynamics using a new “narrative” database of major changes in employment protection for regular workers and product market regulation for non-manufacturing industries covering 26 advanced economies over the past four decades. Our main finding is that product market deregulation is associated with a weakening of the current account, while labor market deregulation is associated with an improvement. These effects are transitory and driven by both saving and investment responses. Labor and product market reforms both have a more positive impact on the current account balance when implemented under weak macroeconomic conditions. Our results are broadly consistent with predictions from recent DSGE models with endogenous producer entry and labor market frictions.

The Aggregate and Distributional Effects of Spatial Frictions

We develop a general equilibrium model of frictional labor reallocation across firms and regions, and use it to quantify the aggregate and distributional effects of spatial frictions that hinder worker mobility across regions in Germany. The model leverages matched employer-employee data to unpack spatial frictions into different types while isolating them from labor market frictions that operate also within region. The estimated model shows sizable spatial frictions between East and West Germany, especially due to the limited ability of workers to obtain job offers from more distant regions. Despite the large real wage gap between East and West of Germany, removing the spatial frictions leads, in equilibrium, to only a small increase in aggregate productivity and it mostly affects the within-region allocation of labor to firms rather than the between-region allocation. However, spatial frictions have large distributional consequences, as their removal drastically reduces the gap in lifetime earnings between East and West Germans.

(In)efficient Separations, Firing Costs and Temporary Contracts

In this paper we study the allocative (in)efficiency of employment protection in relation to firing costs, in a general equilibrium model with labor market frictions. The optimal firing costs depend on the level of unemployment benefits and the degree of centralized wage bargaining, two features of the labor market that induce downward wage rigidity and trigger inefficient employment separations. When restrictions on firing employees with permanent contracts are inefficiently high, the introduction of temporary contracts improves welfare but does not fully restore efficiency. A quantitative analysis for the Italian economy shows that the firing costs before the recent labor market reforms were 30% higher than the optimal level, implying a consumption loss of almost 2% in the steady state. The introduction of fixed-term jobs in the early 2000’s closed one fourth of the gap between inefficient and efficient allocation, although it led to higher unemployment rates and turnover.

Trade and Informality in the Presence of Labor Market Frictions and Regulations

We build an equilibrium model of a small open economy with labor market frictions and imperfectly enforced regulations. Heterogeneous firms sort into the formal or informal sector. We estimate the model using data from Brazil, and use counterfactual simulations to understand how trade affects economic outcomes in the presence of informality. We show that: (1) Trade openness unambiguously decreases informality in the tradable sector, but has ambiguous effects on aggregate informality. (2) The productivity gains from trade are understated when the informal sector is omitted. (3) Trade openness results in large gains even when informality is repressed. (4) Repressing informality increases productivity, but at the expense of employment and welfare. (5) The effects of trade on wage inequality are reversed when the informal sector is incorporated in the analysis. (6) The informal sector works as an unemployment, but not a welfare buffer in the event of negative economic shocks.

Money Demand by Firms, Labor Market Frictions, and Optimal Long-Run Inflation

Money Demand by Firms, Labor Market Frictions, and Optimal Long-Run Inflation

Gender Disparities in the Labour Market? Examining the COVID-19 Pandemic in Alberta

The initial wave of the COVID-19 pandemic generated large labour market disparities between men and women; however, in Alberta these differences did not persist beyond summer 2020. Instead, the pandemic continues to persistently and negatively affect the labour market patterns of parents with young children, regardless of the parent’s gender. This finding should guide policy-makers when planning for the province’s economic recovery. Using data from Alberta up to and including the December 2020 release of the Labour Force Survey, we do not find evidence that the “she-cession” continued into Alberta’s second round of health restriction measures. Instead, we find that school transitions to virtual learning, daycare closures, and parents opting for online learning resulted in profound and persistent effects on workers with young children compared to workers without children. Recovery plans focusing solely on gender may be therefore insufficient for addressing the effects that different groups have experienced during the pandemic. Policy-makers should target policies towards both mothers and fathers with young children. Moreover, new policies should be aimed at supporting parents so that they do not face additional stress over how they will pay their bills and feed their families if they lose their jobs or must reduce their hours to stay home to care for their children. The Canada Recovery Caregiving Benefit (CRCB) should remain in place until all threats of school and child-care facility closures are past. Alberta has received approximately $144 million in direct CRCB subsidies, but the weekly amount of $500 per recipient is less than minimum wage in a full-time job, meaning parents still may be unable to pay bills and meet their families’ needs. The province should top up the CRCB for lower- or single-income parents. Employment Insurance benefits should be made available to parents who quit their jobs to take care of their children as a direct result of public health measures. As well, those parents with young children who receive welfare payments should not be required to search for jobs while public health measures remain in place. The Alberta government needs to work together with the federal government to provide adequate support to daycare centres and schools to cover the added pandemic-related costs. Alberta received $87 million in federal funding to help with those costs and has itself contributed $17.8 million to extra health and safety measures in daycare centres. This is money well spent, for when parents feel their children are in a safe place, they will not keep them at home and jeopardize or lose their own employment. However, the end of the pandemic will not mean an abrupt end to its effects on the labour market. Even though this paper finds no differences in the situations of employed men and women, the latter may experience more labour market friction in the long run, due to missed opportunities for on-the-job training and work experience. One benefit that can come out of the labour market disruptions caused by the pandemic is a renewed focus on addressing pre-pandemic inequities between men and women with children. From this perspective, Alberta should celebrate and embrace the recent federal commitment to a Canada-wide early learning and child care plan.

Policy biases in a model with labor market frictions

We develop a model with labor-market matching frictions that is subject to a range of shocks, including shocks to matching efficiency and bargaining power, and use the model to examine how monetary policy should respond to such shocks. We show that optimal monetary policy is highly efficient at responding to these labor market shocks, producing outcomes that are close to the flex-price equilibrium. Moreover, this efficiency remains if monetary policy is conducted with discretion, indicating that time-inconsistency and forward-guidance are not central to the policy response. We also show that several popular simple rules are also effective at responding to these labor market shocks.

Zero-hours Contracts in a Frictional Labor Market

Zero-hours Contracts in a Frictional Labor Market

Can export promotion reduce unemployment?

The paper examines the impact of export promotion on aggregate unemployment. We findnd that increases in the share of Export Promotion Agencies' (EPAs) budgets on total exports lead to small decreases in aggregate unemployment. This effect is amplifi ed when export promotion efforts are concentrated in sectors in which the country has a comparative advantage. On the other hand, when EPAs aim at reducing aggregate unemployment by focusing their efforts in sectors with high levels of unemployment, then aggregate unemployment increases. These results suggest that even if EPAs' pri- orities were to shift towards reducing unemployment, this would be better addressed by focusing on sectors in which the country has a comparative advantage rather than sectors with high labor market frictions.

Labor Adjustment and Productivity in the OECD

Labor productivity is more procyclical in OECD countries with lower employment volatility. To capture this new stylized fact, we propose a business cycle model with employment adjustment costs, variable hours and labor effort. We show that, in our model with variable effort, greater labor market frictions are associated with procyclical labor productivity as well as stable employment. In contrast, the constant-effort model fails to replicate the observed cross-country pattern in the data. By implication, labor market deregulation has a greater effect on the cyclicality of labor productivity and on the relative volatility of employment when effort can vary.