Labor Market Search Research Articles

Inflation and Output Dynamics in a Model with Labor Market Search and Capital Accumulation

Inflation and Output Dynamics in a Model with Labor Market Search and Capital Accumulation

Wage Rigidity and Job Creation

Shimer (2005) and Hall (2005) have documented the failure of standard labor market search models to match business cycle fluctuations in employment and unemployment. They argue that it is likely that wages are not adjusted as regularly as suggested by the model, which would explain why employment is more volatile than the model predicts. We explore whether this explanation is consistent with the data. The main insight is that the relevant wage data for the search model are not aggregate wages, but wages of newly hired workers. Our results show that wages for those workers are much more volatile than aggregate wages and respond one-for-one to changes in labor productivity. Thus, we find no evidence for wage rigidity.

In search of the natural rate of unemployment

The natural rate of unemployment can be measured as the time-varying steady state of a structural vector autoregression. For post-War US data, the natural rate implied by this approach is more volatile than most previous estimates, with its movements accounting for the bulk of the variation in the unemployment rate, as well as substantial portions of the variation in aggregate output and inflation. These movements, in turn, can be related to variables associated with labor-market search theory, including unemployment benefits, labor productivity, real wages, and sectoral shifts in the labor market. There is also a strong negative relationship between inflation and the corresponding measure of cyclical unemployment, supporting the existence of a short-run Phillips curve.

Worker turnover, industry localization, and producer size

Empirically, large employers have been shown to devote greater resources to filling vacancies than small employers. Following this evidence, this paper offers a theory of producer size based on labor market search, whereby a key factor in the determination of a producer’s total employment is the ease with which workers can be found to fill jobs that are, periodically, vacated. Since the geographic localization of industry has long been conjectured to facilitate the search process, the model provides an explanation for the observed positive association between average producer size and the magnitude of an industry’s presence within local labor markets.

Worker Turnover, Industry Localization, and Producer Size

Empirically, large employers have been shown to devote greater resources to filling vacancies than small employers. Following this evidence, this paper offers a theory of producer size based on labor market search, whereby a key factor in the determination of producer's total employment is the ease with which workers can be found to fill jobs that are, periodically, vacated. Since the geographic localization of industry has long been conjectured to facilitate the search process, the model provides an explanation for the observed positive association between average producer size and the magnitude of an industry's presence within local labor markets.

The Role of Search Frictions and Bargaining for Inflation Dynamics

This paper develops a dynamic general equilibrium model that integrates labor market search and matching into an otherwise standard New Keynesian model. I allow for changes of the labor input at both the extensive and the intensive margin and develop two alternative specifications of the bargaining process. Under efficient bargaining (EB) hours are determined jointly by the firm and the worker as a part of the same Nash bargain that determines wages. With right to manage (RTM), instead, firms retain the right to set hours of work unilaterally. I show that introducing search and matching frictions affects the cyclical behavior of real marginal costs by way of two different channels: a wage channel under RTM and an extensive margin channel under EB. In both cases, the presence of search and matching frictions may cause a lower elasticity of marginal costs with respect to output and thus help to account for the observed inertia in inflation.

Welfare-Theoretic Criterion and Labour Market Search

This paper extends the utility-based welfare criterion developed by Woodford (2003) to a model with labour market search. We show how the central banker's concern for inflation stabilization depends on the average steady-state durations of unemployment and job vacancy.

Labor market search, sticky prices, and interest rate policies

What accounts for the significant real effects of monetary policy shocks? And what accounts for the persistent and hump shaped responses of output and inflation in response to such shocks? These questions are investigated in a model that incorporates labor market search, habit persistence, sticky prices, and policy inertia. While habit persistence and price stickiness are important for the hump shaped output response and the long, drawn out inflation response, respectively, labor market frictions increase the output response and reduce the inflation response relative to an otherwise similar model based on a Walrasian labor market. Significantly, policy inertia itself is found to be the most important factor in accounting for the magnitude of the output effects of policy shocks in the model.

Optimal capital taxation and labor market search

In this paper I study the nature of optimal factor income taxation in a neoclassical growth model where search frictions on the labor marker generate unemployment. I show that the introduction of search frictions changes the Chamley–Judd result of zero capital taxation as follows: if the government is constrained to capital and labor taxation, the optimal capital tax is in general non-zero, but if the government has access to other tax instruments the Chamley–Judd result survives. Quantitatively, the optimal capital tax is small, in the range of −8 to 8 percent. The welfare costs of being constrained can, however, be quite large.

Self-Esteem and Labour Market Choices

We assume that people have beliefs about their abilities, that these generate self-esteem, and that self-esteem is valued intrinsically. We consider the implications for an individual's incentive to manage their self-esteem in the labour market. Employing a model of labour market search with Bayesian updating, we show that a self-esteem sensitive individual has an incentive to avoid the situation (in avoiding the truth), self-handicap (in avoiding the truth without avoiding search), to employ downward comparison (in manipulating the truth), and engage in defensive pessimism (in avoiding materially damaging strategies like self-handicapping).

Labor Market Search and Optimal Retirement Policy

A popular and long‐standing view is that social security is a means for young, unemployed people to “purchase” jobs from older workers. Can social security, by encouraging retirement and hence creating job vacancies for the young, improve the allocation of workers to jobs? Maybe, according to a standard model of labor market search, but public retirement programs currently pay the elderly substantially more than their jobs are worth. An important effect is that retirement reduces the value of other vacant jobs. Our results imply that recent reforms aimed at reducing retirement incentives are likely to improve labor market efficiency.

Labor Market Search, Wage Bargaining and Inflation Dynamics

This paper integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities. The model is used to study the dynamic response of the economy to a monetary policy shock. The labor market displays search and matching frictions and bargaining over real wages and hours of work. Search frictions generate unemployment in equilibrium. Wage bargaining introduces a microfounded real wage rigidity. First, I study a Nash bargaining model. Then, I develop an alternative bargaining model, which I refer to as right-to-manage bargaining. Both models have similar predictions in terms of real wage dynamics: bargaining significantly reduces the volatility of the real wage. But they have different implications for inflation dynamics: under right-to-manage, the real wage rigidity also results in smaller fluctuations of inflation. These findings are consistent with recent evidence suggesting that real wages and inflation only vary by a moderate amount in response to a monetary shock. Finally, the model can explain important features of labor-market fluctuations. In particular, a monetary expansion leads to a rise in job creation and to a hump-shaped decline in unemployment.

Sources of growth and the spectral properties of the labor market search model

This paper studies the dynamic properties of the labor market search model using three alternative sources of growth. Deterministic and stochastic exogenous growth specifications are compared with an endogenous growth specification, which is based on an external learning-by-doing mechanism. We apply Watson's (J. Political Economy 101 (6) (1993) 1011) test to assess the models’ performances over different frequency ranges. It is shown that the endogenous growth specification can bring the labor market search model into closer conformity with the data than its exogenous counterparts.

Labor market search and real business cycles: reconciling Nash bargaining with the real wage dynamics

This paper modifies the standard one-sector stochastic growth model in an effort to explain the observed low procyclicality of the aggregate real wage in the USA. The modifications include labor market matching with Nash-bargaining of wages and preferences as introduced in the literature by Rogerson and Wright [Journal of Monetary Economics 22 (3) (1988) 501–516]. These preferences are non-separable in consumption and leisure. They imply that in an equilibrium with efficient risk-sharing, the utility of employed agents exceeds that of unemployed agents. The simulation results suggest that our modified model overcomes one important weakness of the standard model, namely the predicted high contemporaneous correlation of the aggregate real wage with both output and labor input.

Along the New Keynesian Phillips Curve with Nominal and Real Rigidities

Abstract: The new Keynesian Phillips curve (NKPC) has become central to monetary theory and policy. A seemingly benign NKPC prediction is that trend shocks dominate price level fluctuations at all forecast horizons. Since the NKPC cycle of the U.S. GDP deflator peaks at each of the last seven NBER dated recessions, support for the NKPC is limited. The authors develop monetary business cycle models that contain different combinations of nominal (sticky-price) and real (labor market search) rigidities to understand this puzzle. Simulations indicate that a model combining labor market search and flexible prices is better able to match actual price level movements than sticky-price models do. This model represents a challenge to claims that sticky prices are a key part of the monetary transmission mechanism. JEL classification: E3, E5 Key words: new Keynesian Phillips curve, sticky prices, labor market search, common trend, common cycle 1. Introduction Of all the comebacks of the 1990s, it seems a revival in Phillips curve research was the least anticipated. Unlike earlier Phillips curve research that focused on aggregate demand shocks, recent work aims to identify inflationary expectations. The way inflationary expectations are formed matters for business cycle theory and monetary policy. For example, a Phillips curve dependent more on forward- than backward-looking expectations allows policymakers to disinflate with few costs. This favorable trade-off appears at odds with empirical evidence and the views of policymakers. Yun (1996) constructs a rational expectations-monetary business cycle model consistent with a revivalist Phillips curve. He assumes monopolistically competitive firms maximize their expected discounted profit stream subject to a sticky price constraint that reflects a nominal rigidity. The solution to the firms' problem can be cast as the new Keynesian Phillips curve (NKPC) in which price expectations are forward-looking and real marginal cost is the fundamental. The forward-looking NKPC implies a present-value (PV) relation for the price level. The NKPC-PV relation predicts that trend shocks dominate price level movements, in the same way the permanent income hypothesis restricts consumption. If the price level has an economically important cycle, it rejects the NKPC null that only trend shocks matter. This paper uses NKPC-PV predictions to ask if a sticky price-nominal rigidity is needed by a dynamic stochastic general equilibrium (DSGE) model to generate a NKPC that mimics its empirical counterpart. A Beveridge and Nelson (1981), Stock and Watson (1988), and Vahid and Engle (1993) common trend-common cycle price level decomposition links the empirical and theoretical NKPCs. Thus, we study a key feature of a Phillips curve: its predictions for price level dynamics. The Beveridge, Nelson, Stock, Watson-Vahid and Engle (BNSW-VE) decomposition of the NKPC provides us with three moments. The moments are (i) the fraction of price constrained firms, (ii) the NKPC common trend-common cycle decomposition, and (iii) the associated forecast error variance decomposition (FEVD). We use these moments to test the implications of the NKPC-PV restrictions for DSGE models. (1) Sample NKPC moments are based on U.S. GDP deflator and nominal unit labor cost data that runs from 1960Q1 to 2001Q4. Our estimate of NKPC moment (i) has about half of final goods firms being price constrained, which is similar to Sbordone (2002), but smaller than those Gali and Gertler (1999) report. The cycle of NKPC sample moment (ii) is economically important because it peaks at each of the last seven NBER dated recessions. NKPC sample moment (iii) shows trend shocks explain 60 percent of price level variation at a forecast horizon of two years. Thus, NKPC sample moments (ii)-(iii) reject the NKPC-PV predictions. We solve and simulate a version of the Yun (1996) DSGE model to understand the sources and causes of NKPC sample moments (i)-(iii). …

Labor Market Search, Sticky Prices, and Interest Rate Policies

In this paper, a simple search model of the labor market is combined with sticky prices to investigate the dynamic response of the economy to nominal interest rate shocks. The framework allows the respective roles of labor market search, nominal price rigidities, and policy inertia in accounting for the impact of monetary policy shocks to be studied. Labor market rigidities introduced by the process of matching job seekers with job vacancies amplify the real impact and reduce the inflation impact of a monetary policy shock. As a result, significantly less price rigidity is required; for example, the dynamic response of output and inflation in the new Keynesian model with a Walrasian labor market and only 15% of firms optimally adjusting prices each period can be replicated in the labor market search model when a more realistic 50% of firms optimally adjust their price each period.

Allocation du temps et propriétés cycliques du modèle d'appariement sur le marché du travail

Cet article étudie les propriétés cycliques du modèle d’appariement avec une destruction exogène des emplois. Son mécanisme de propagation interne des chocs a été critiqué en raison des trop fortes contraintes sur le marché du travail qu’il requiert. Pour évaluer la portée de cette critique, les prédictions de ce modèle sont comparées selon plusieurs hypothèses régissant la définition du taux d’emploi ainsi que les allocations du temps au travail et à la recherche d’emploi. Les résultats indiquent qu’il suffit de prendre en compte la variabilité de ces allocations pour que le modèle puisse reproduire conjointement les faits stylisés du marché du travail et la persistance du produit.

Information and Communication Technology as Technical Change in Matching and Production

In this paper, we integrate two workhorse models in economics: The monopolistic competition model of Dixit and Stiglitz and the search unemployment model of Pissarides. Information and communication technology (ICT) is interpreted as a (i) technical progress in the matching function of the Pissarides labor market search model, where it is increasing the probability of filling a vacancy, and (ii) technical change in the production function of the Dixit-Stiglitz goods market model where it is increasing fixed costs and decreasing variable costs. All effects together, modeled as a permanent once-and-for-all ICT and internet shock, increase the vacancy/unemployment ratio, decrease the long-run equilibrium unemployment rate, and increase wages.

Can the labor market search model explain the fluctuations of allocations of time?

We examine whether the labor market search model can account for the business cycle facts on the three uses of time: employment, unemployment and non-participation. The standard search model is modified by making endogenous the time allocation decision between market and non-market activities. Despite its good performance on the employment rate, this framework fails to mimic the empirical dynamics on the two other uses of time, notably the strongly countercyclical behavior of the unemployment rate. This conclusion is shown to be robust to the specification of households’ preferences.

Labor-Market Search and International Business Cycles

The objective of this paper is to explain the observed international fluctuations by modifying the traditional modelling of the labor market in the two-country real business cycles model. Our intuition is that labor-market search can be useful to understand the propagation of international fluctuations. Changes in the expected returns to search induce responses in search and recruiting activities, the effects of which are propagated through time via changes in the stock of employment. Given that the technology shock spills over to the other country, domestic and foreign firms start searching at the same time in anticipation. Employment then increases simultaneously and displays a hump-shaped profile in the two countries. This partially curtails the capital outflow from the country which does not benefit from the shock. Introducing in a search framework a non-separability between consumption and leisure in the utility function allows both to solve the consumption puzzle and to complete the explanation of the international comovement puzzle. Journal of Economic Literature Classification Numbers: E32, F41, J40.