Labor Market Search Frictions Research Articles

Automation, Bargaining Power, and Labor Market Fluctuations

We argue that the threat of automation weakens workers’ bargaining power in wage negotiations, dampening wage adjustments and amplifying unemployment fluctuations. We make this argument based on a business cycle model with labor market search frictions, generalized to incorporate automation decisions. In the model, procyclical automation threats create endogenous real wage rigidity that amplifies labor market fluctuations. The automation mechanism is consistent with empirical evidence. It is also quantitatively important for explaining the large volatilities of unemployment and vacancies relative to that of real wages, a puzzling observation through the lens of standard business cycle models. (JEL E13, E24, E32, J31, J63, J64)

Pollution and labor market search externalities over the business cycle

We study the relationship between unemployment, environmental policy, and business cycles. We develop a dynamic stochastic general equilibrium real business cycle model that includes both a pollution externality and congestion externalities from labor market search frictions. These frictions generate unemployment on the extensive margin and affect hours worked on the intensive margin. We consider two policies to address the market failures: an emissions tax and a tax or subsidy on job creation. With both policies present, the efficient outcome can be achieved. When one policy is constrained or absent, we solve for the second best. The absence of a vacancy policy to address the congestion externalities substantially affects the value of the emissions tax, both in steady state and over the business cycle.

Automation, Bargaining Power, and Labor Market Fluctuations

We argue that the threat of automation weakens workers' bargaining power in wage negotiations, dampening wage adjustments and amplifying unemployment fluctuations. We make this argument based on a quantitative business cycle model with labor market search frictions, generalized to incorporate automation decisions and estimated to fit U.S. time series. In the model, procyclical automation threats create real wage rigidity that amplify labor market fluctuations. We find that this automation mechanism is quantitatively important for explaining the large volatilities of unemployment and vacancies relative to that of real wages, a puzzling observation through the lens of standard business cycle models.

CFO Gaps: Determinants and Impact on the Corporate Information Environment

ABSTRACT A CFO gap arises when the CFO position is left vacant for a period between the departure of the old CFO and the appointment of a new CFO. We find that CFO gaps are fairly common; over the sample period 2004–2016, approximately one-third of CFO turnovers are associated with a CFO gap, lasting, on average, two quarters and two months. CFO gaps are more likely for firms that face more labor market search frictions and with financial reporting and performance issues, and are less likely for firms with succession plans and with greater growth opportunities. While CFO gaps are not associated with significant changes in firms' financial reporting quality, they are associated with significantly negative changes in firms' voluntary disclosure frequency and analysts' forecast quality. Our findings shed light on the factors that influence top executive gaps and the impact of such gaps on firms' information environment.

Pollution and Labor Market Search Externalities Over the Business Cycle

We study the relationship between unemployment, environmental policy, and business cycles. We develop a dynamic stochastic general equilibrium real business cycle model that includes both a pollution externality and congestion externalities from labor market search frictions, which generate unemployment. We consider two policies to address the market failures: an emissions tax and a tax or subsidy on job creation. With both policies present, the efficient outcome can be achieved. When one policy is constrained or absent, we solve for the second best. The absence of a vacancy policy to address the congestion externalities substantially affects the value of the emissions tax, both in steady state and over the business cycle. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Countercyclical Fluctuations in Uncertainty are Endogenous

This paper uses a battery of calibrated and estimated structural models to determine the causal drivers of the negative correlation between output and aggregate uncertainty. We find the transmission of uncertainty shocks to output is weak, while aggregate uncertainty endogenously responds to first moment shocks in the presence of labor market search frictions. This indicates that countercyclical movements in aggregate uncertainty are endogenous responses to changes in output, rather than exogenous impulses. A vector autoregression on simulated data shows recursive identification techniques do not robustly identify structural uncertainty shocks.

Pollution and Labor Market Search Externalities Over the Business Cycle

We study the relationship between unemployment, environmental policy, and business cycles. We develop a dynamic stochastic general equilibrium real business cycle model that includes both a pollution externality and congestion externalities from labor market search frictions, which generate unemployment. We consider two policies to address the market failures: an emissions tax and a tax or subsidy on job creation. With both policies present, the efficient outcome can be achieved. When one policy is constrained or absent, we solve for the second best. The absence of a vacancy policy to address the congestion externalities substantially affects the value of the emissions tax, both in steady state and over the business cycle.

Fiscal austerity and unemployment

This paper studies the joint dynamics of fiscal deficits and unemployment in a neoclassical growth model with distortionary taxation, labor market search frictions, and real wage rigidities. First, we show that a tax increase or a reduction in government spending can improve the fiscal balance at the expense of a higher unemployment rate. However, under a scenario of rigid wages and productivity gains, it is possible to achieve a simultaneous reduction of the fiscal deficit and the unemployment rate. Second, we analyze the Swedish fiscal consolidation episode of the 1990s through the lens of the model. The model is capable of reproducing the simultaneous reduction in fiscal deficits and unemployment observed during this episode. Counterfactual simulations show that in the absence of TFP gains and rigid wages, fiscal consolidation measures alone would not have eliminated fiscal deficits, and the unemployment rate would have reached double digit levels.

The Role of Uncertainty in Jobless Recoveries

The three most recent downturns, in contrast with other post-war recessions, are characterized by slow recoveries in employment despite positive economic growth. I find that recent recoveries coincide with high uncertainty about economy-wide corporate profits at a time when output begins to rebound, a pattern that was not observed in the earlier recessions. To examine the role of uncertainty in jobless recoveries, I develop a dynamic stochastic general equilibrium model with search and matching frictions in the labor market and an intensive labor margin. The model is driven by productivity and time-varying volatility shocks. The uncertainty agents face is captured by time-varying volatility. Labor market search frictions generate costly labor adjustment. When an uncertainty shock hits the economy, firms reduce the number of vacancies posted because they are reluctant to make costly adjustments along the extensive margin. Instead, firms require more effort from their employees. This, along with positive productivity shocks, can result in jobless recoveries. I calibrate the model and show that, with the addition of uncertainty shocks, this model produces labor market dynamics that allows it to address recent episodes of jobless recoveries.

Comparing Solution Methods for DSGE Models with Labor Market Search

I compare the performance of solution methods in solving a standard real business cycle model with labor market search frictions. Under the conventional calibration, the model is solved by the projection method using the Chebyshev polynomials as its basis, and the perturbation methods up to third order in both levels and logs. Evaluated by two accuracy tests, the projection approximation achieves the highest degree of accuracy, closely followed by the third order perturbation in levels. Although different in accuracy, all the approximated solutions produce simulated moments similar in value.

THE EFFECT OF LABOR AND FINANCIAL FRICTIONS ON AGGREGATE FLUCTUATIONS

This paper embeds labor market search frictions into a New Keynesian model with financial frictions. The econometric estimation establishes that labor market frictions substantially improve the empirical fit of the model. The effect of the interaction between labor and financial frictions on aggregate fluctuations depends on the nature of the shock. For monetary policy, technology, and entrepreneurial wealth shocks, labor market frictions amplify the effect of financial frictions, because robust changes in hiring lead to persistent movements in employment and return on capital that reinforce the original effect of financial frictions. For cost-push, labor supply, marginal efficiency of investment, and preference shocks, labor market frictions dampen the effect of financial frictions by reducing the real cost of repaying existing debt, which lowers the external finance premium.

Volatility Modelling of CO2 Emission Allowance Spot Prices with Regime-Switching GARCH Models

We analyse the short-term spot price of European Union Allowances (EUAs), which is of particular importance in the transition of energy markets and for the development of new risk management strategies. Due to the characteristics of the price process, such as volatility persistence, breaks in the volatility process and heavy-tailed distributions, we investigate the use of Markov switching GARCH (MS-GARCH) models on daily spot market data from the second trading period of the EU ETS. Emphasis is given to short-term forecasting of prices and volatility. We find that MS-GARCH models distinguish well between two states and that the volatility processes in the states are clearly dierent. This finding can be explained by the EU ETS design. Our results support the use of MS-GARCH models for risk management, especially because their forecasting ability is better than other Markov switching or simple GARCH models.

The Laffer Curve in a Frictional Labor Market

This paper investigates whether labor market search frictions affect the long run responses of government revenues to changes in income taxes. The findings show that labor market parameters may significantly change the tax base and affect the reaction of government receipts in the long run.

Understanding the City Size Wage Gap

In this paper, we decompose city size wage premia into various components. We base these decompositions on an estimated on-the-job search model that incorporates latent ability, search frictions, firm-worker match quality, human capital accumulation and endogenous migration between large, medium and small cities. Counterfactual simulations of the model indicate that variation in returns to experience and differences in wage intercepts across location type are the most important mechanisms contributing to observed city size wage premia. Variation in returns to experience is more important for generating wage premia between large and small locations while differences in wage intercepts are more important for generating wage premia betwen medium and small locations. Sorting on unobserved ability within education group and differences in labor market search frictions and distributions of firm-worker match quality contribute little to observed city size wage premia. These conclusions hold for separate samples of high school and college graduates.

Search Frictions and the Labor Wedge

This paper shows that labor market search frictions do not explain fluctuations in the labor wedge per se. However, the introduction of extensive and intensive margin clarifies that measuring the MRS in terms of total hours artificially introduces procyclicality in the MRS. When the MRS is correctly measured in terms of hours per worker, the labor wedge obtained is less variable than the one of the competitive model. Finally, we show that it is possible to measure a strongly procyclical labor wedge when the actual data generating process is a search model that allows for movements in both margins.

Search Frictions and the Labor Wedge

This paper shows that labor market search frictions do not explain fluctuations in the labor wedge per se. However, the introduction of extensive and intensive margin clarifies that measuring the MRS in terms of total hours artificially introduces procyclicality in the MRS. When the MRS is correctly measured in terms of hours per worker, the labor wedge obtained is less variable than the one of the competitive model. Finally, we show that it is possible to measure a strongly procyclical labor wedge when the actual data generating process is a search model that allows for movements in both margins.

Offshoring and unemployment: The role of search frictions labor mobility

In a two-sector, general-equilibrium model with labor-market search frictions, we find that the wage increases and sectoral unemployment decreases upon offshoring in the presence of perfect intersectoral labor mobility. If, as a result, labor moves to the sector with the lower (or equal) vacancy costs, there is an unambiguous decrease in economywide unemployment. With imperfect intersectoral labor mobility, unemployment in the offshoring sector can rise, with an unambiguous unemployment reduction in the non-offshoring sector. Imperfect labor mobility can result in a mixed equilibrium in which only some firms offshore, with unemployment in the offshoring sector rising.

On-the-job search, sticky prices, and persistence

Models of the monetary transmission mechanism often generate empirically implausible business fluctuations. This paper analyzes the role of on-the-job search in the propagation of monetary shocks in a sticky price model with labor market search frictions. Such frictions induce long-term employment relationships, such that the real marginal cost is determined by real wages and the cost of an employment relationship. On-the-job search opens up an extra channel of employment growth that dampens the response of these two components. Because real marginal cost rigidity induces small price adjustments, on-the-job search gives rise to a strong propagation of monetary shocks that increases output persistence.

On-the-Job Search, Sticky Prices, and Persistence

Models of the monetary transmission mechanism often generate empirically implausible business fluctuations. This paper analyzes the role of on-the-job search in the propagation of monetary shocks in a sticky price model with labor market search frictions. Such frictions induce long-term employment relationships, such that the real marginal cost is determined by real wages and the cost of an employment relationship. On-the-job search opens up an extra channel of employment growth that dampens the response of these two components. Because real marginal cost rigidity induces small price adjustments, on-the-job search gives rise to a strong propagation of monetary shocks that increases output persistence.