Labor Search Frictions Research Articles

Taxation, social welfare, and labor market frictions

Taking taxation inefficiencies as given, a well-known public finance result is that in partial equilibrium the elasticity of taxable income (ETI) is a sufficient statistic for the deadweight loss (DWL) from labor income taxation. We revisit this result using a general equilibrium macroeconomic framework with labor search frictions. Our theory parses out the extent to which search frictions in and of themselves can distort the DWL-ETI relationship. Numerical analysis suggests that DWL is nearly 10 percent above the ETI given search frictions, only. Accounting for externalities can drive this figure up to about 20 percent, and accounting unemployment benefits can increase this number up to nearly 40 percent. Parsing out these effects both analytically and quantitatively yields novel results that contribute jointly to the public finance and macroeconomic literatures.

Unemployment dynamics and informality in small open economies

Despite the typically more pronounced aggregate fluctuations in emerging market economies (EMEs), this paper documents that EMEs exhibit lower relative volatility and countercyclicality of the unemployment rate than small open advanced economies. We link these differences to the larger informal economy in EMEs. We build a small open economy model that combines a formal sector featuring labor search frictions with a frictionless informal sector. A larger informal sector amplifies the impact of productivity and interest rate shocks on formal output, consumption, and employment, while dampening their impact on unemployment. Varying the degree of informality explains a significant fraction of differences in unemployment dynamics across small open economies.

Taxation, Social Welfare, and Labor Market Frictions

Taking inefficiencies from taxation as given, a well-known public finance literature shows that the elasticity of taxable income (ETI) is a sufficient statistic for assessing the deadweight loss (DWL) from taxing labor income in a static neoclassical framework. Using a theoretical approach, we revisit this result from the vantage point of a general equilibrium macroeconomic model with labor search frictions. We show that, in this context, and against the backdrop of inefficient taxation, DWL can be up to 38 percent higher than the ETI under a range of reasonable parametric assumptions. Externalities arising from market participants not taking into account the impact of changes in their search- and vacancy-posting activities on other market participants can amplify this divergence substantially. However, with theoretical precision, we show how the wedge between the ETI and DWL can be controlled for, using readily observable variables.

Labor Productivity, Effort and the Euro Area Business Cycle

The Euro Area is characterized by little variation in unemployment and strongly procyclical labor productivity. We capture both characteristics in a New Keynesian business cycle model with labor search frictions, where labor can vary along three margins: employment, hours, and effort. We estimate the model with Bayesian methods and find evidence for a significant use of the effort margin in generating procyclical productivity. We show that a model with labor effort is more successful at matching the business cycle facts than is one with variable capital utilization or dominant technology shocks. Finally, we demonstrate that effort dampens the response of inflation to exogenous shocks.

Moral Hazard in Lending and Labor Market Volatility

AbstractWhen the economy experiences a sharp economic downturn, credit spreads widen and project financing costs for firms rise as funding sources begin to dry up. The economy experiences a lengthy recovery, with unemployment rates slow to return to “full employment” levels. We develop a model that displays these features. It relies on an interaction between labor search frictions and firm‐level moral hazard that is accentuated during recessions. The model is capable of addressing the “Shimer puzzle,” with labor market variables exhibiting significantly more volatility on average as a result of the heightened moral hazard concerns during these episodes that significantly deepen and prolong periods of high unemployment, as vacancy postings fall dramatically and the job‐finding rate declines. Our mechanism is also found to induce internal shock propagation causing the peak response of output, unemployment, and wages to occur with a several quarter delay relative to a model without such frictions. Many other labor market variables also show slower recovery—their return to preshock level occurs at a slower pace for a number of periods after the peak response.

A Model of Capital Structure Under Labor Market Search

This paper develops a competitive search equilibrium model of capital structure and labor outcomes. In the model, employers design capital structures and compete for workers subject to idiosyncratic productivity shocks and labor search frictions. The capital structure policy reflects the trade-off between the strategic benefit of debt in wage bargaining and the cost of debt in labor hiring. The model generates rich comparative static implications regarding the impacts of productivity, credit and labor market factors on leverage and labor outcomes. A calibration yields a large wage dispersion and a highly elastic labor market tightness with respect to productivity.

A Labor Capital Asset Pricing Model

ABSTRACTWe show that labor search frictions are an important determinant of the cross‐section of equity returns. Empirically, we find that firms with low loadings on labor market tightness outperform firms with high loadings by 6% annually. We propose a partial equilibrium labor market model in which heterogeneous firms make dynamic employment decisions under labor search frictions. In the model, loadings on labor market tightness proxy for priced time‐variation in the efficiency of the aggregate matching technology. Firms with low loadings are more exposed to adverse matching efficiency shocks and require higher expected stock returns.

Cyclical Job Upgrading, Wage Inequality, and Unemployment Dynamics

This paper studies the implications of a monetary policy shock on the skill premium and the unemployment persistence. A VAR demonstrates that a contractionary policy induces a lagged decline in the skill premium and a larger and more persistent increase in the unemployment ratio of the unskilled relative to that of the skilled. A new Keynesian framework characterized by labor search frictions is developed. The labor force is divided into high and low educated. Firms post two types of vacancies: the complex that can be matched with the high educated, and the simple that can be matched with both the high and the low educated. A positive shock to the nominal interest rate induces the high educated unemployed to compete with the low educated, as they increase their search intensity for simple vacancies. As the high educated occupy simple vacancies, they crowd out the low educated into unemployment. This downgrading of jobs, and the subsequent crowding out of the low educated into unemployment, provide a possible explanation to unemployment persistence and the response of the skill premium.

A Labor Capital Asset Pricing Model

We show that labor search frictions are an important determinant of the cross-section of equity returns. In the data, sorting firms by loadings on labor market tightness, the key statistic of search models, generates a spread in future returns of 6% annually. We propose a partial equilibrium labor market model in which heterogeneous firms make optimal employment decisions under labor search frictions. In the model, loadings on labor market tightness proxy for priced time variation in the efficiency of the matching technology. Firms with low loadings are not hedged against adverse matching efficiency shocks and require higher expected stock returns.

A Labor Capital Asset Pricing Model

We show that labor search frictions are an important determinant of the cross-section of equity returns. Empirically, we find that firms with low loadings on labor market tightness outperform firms with high loadings by 6% annually. We propose a partial equilibrium labor market model in which heterogeneous firms make dynamic employment decisions under labor search frictions. In the model, loadings on labor market tightness proxy for priced time variation in the efficiency of the aggregate matching technology. Firms with low loadings are more exposed to adverse matching efficiency shocks and require higher expected stock returns.

A New-Monetarist Phillips Curve

A model with labor search, limited recordkeeping and market segmentation is provided to explain the correlations between inflation and real variables in the short run, and in the long run. A one-time money injection causes intensive-margin effects on employment, and reduces the unemployment rate in the short run. There are persistent liquidity effects on real variables, inflation and the nominal interest rate, as a result of search frictions in the labor market. Money injections in the long run raise the unemployment rate. The optimal monetary policy minimizes the distortion from labor-search frictions, and eliminates the intertemporal monetary distortion and the market segmentation friction.

Human capital investment with competitive labor search

We study human capital accumulation in the presence of labor search frictions. Given that unemployed workers can default on their education loans, skilled individuals with a larger debt burden prefer riskier but better paid careers than is socially desirable. A higher level of employment risk in turn depresses the skill premium and the incentives to invest in education. The equilibrium allocation is characterized by too low employment, underinvestment by the poor, and too little investment in skill-intensive technologies. A public education system funded by graduate taxes can restore efficiency, and it would also reduce wage inequality.