Evaluating the performance of the search and matching model

Does the search and matching model fit aggregate U.S. labor market data? While the model has become an important tool of macroeconomic analysis, recent literature pointed to some significant failures in accounting for the data. This paper aims to answer two questions: (i) Does the model fit the data, and, if so, on what dimensions? (ii) Does the data “fit” the model, i.e. what are the data which are relevant to be explained by the model?The analysis shows that the model fits certain specifications of the data on many dimensions, though not on all. This includes capturing the high persistence and high volatility of most of the key variables, the negative co-variation of unemployment and vacancies, and the behavior of the worker job finding rate. A key role in this fit is played by the convexity of hiring costs and the stochastic properties of the separation rate. The latter is a major component of the rate discounting the future value of the job-worker match.The paper offers a workable, empirically grounded version of the model for the analysis of aggregate U.S. labor market dynamics.     

Search frictions and labor market participation

Cross-country differences in labor market participation are often larger than differences in unemployment rates. The same holds true across demographic groups within a given economy. We argue that the interaction between labor force participation decisions and labor market frictions can help us understand these patterns. This interaction highlights dynamic aspects of the participation decision, in contrast to standard textbook treatments that emphasize static costs and benefits of participation. We extend the standard labor market search problem to allow for a third state—non-participation—and assumes that stochastic participation costs precipitate flows into and out of non-participation. We fully characterize the worker's decision problem and use numerical simulations to demonstrate how participation patterns vary with individual characteristics and with labor market conditions.     

A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis

A Dynamic Stochastic Disequilibrium model is proposed for business cycle analysis. The core innovation and fundamental deviation from the corresponding full-employment Dynamic Stochastic General Equilibrium model is the assumption that the nominal wage is a policy variable with no tendency to clear the labor market. As a consequence, disequilibrium unemployment arises which crucially alters the transmission of macroeconomic shocks. Solving the puzzle of low fiscal multipliers in conventional general equilibrium models, the effects of spending shocks become considerably more pronounced in the disequilibrium model because idle labor can be quickly utilized to accommodate aggregate demand without requiring households to increase their supply. In contrast to the standard model, technology and labor supply shocks are partly absorbed by unemployment and, hence, only moderately expansionary. Despite its simplicity and unlike the corresponding general equilibrium model, the disequilibrium model is able to generate shock responses which are broadly in line with empirical evidence.     

The role of labor markets for euro area monetary policy

In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behavior and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy.     

Termination of dynamic contracts in an equilibrium labor market model

In an equilibrium model of the labor market, workers and firms enter into dynamic contracts that can potentially last forever, but are subject to optimal terminations. Upon termination, the firm hires a new worker, and the worker who is terminated receives a termination contract from the firm and is then free to go back to the labor market to seek new employment opportunities and enter into new dynamic contracts. The model permits only two types of equilibrium terminations that resemble, respectively, the two kinds of labor market separations that are typically observed in practice: involuntary layoffs and voluntary retirements. The model allows for the simultaneous determination of a large set of important labor market variables including equilibrium unemployment and labor force participation. An algorithm is formulated for computing the model's equilibria. I then simulate the model to show quantitatively that the model is consistent with a set of important stylized facts of the labor market.     

The German labor market during the Great Recession: Shocks and institutions

This paper analyzes Germany's unusual labor market experience during the Great Recession. We estimate a general equilibrium model with a detailed labor market block for post-unification Germany. This allows us to disentangle the role of institutions (short-time work, government spending rules) and shocks (aggregate, labor market, and policy shocks) and to perform counterfactual exercises. We identify positive labor market performance shocks (likely caused by labor market reforms) as the key driver for the “German labor market miracle” during the Great Recession.     

Implementing the Mortensen rule in a frictional labor market

We show that, in settings where meetings can be multilateral, the allocation rule proposed by Mortensen (1982) can be relatively straightforward to implement: as a local auction conducted by sellers. The implications of using this mechanism in a simple model of the labor market are then explored. We characterize the equilibrium properties of this model, which include wage dispersion, and examine its implied Beveridge curve. A dynamic version of the model is calibrated to the US labor market, and we show that the model can account for observed vacancy rates, given parameters that are chosen to match the average wages and the natural rate of unemployment, although the implied wage dispersion is quite small. Finally, in the limit, as the time between offer rounds in the model approaches zero, the equilibrium approaches the Walrasian competitive equilibrium.     

Impacts of hiring subsidies targeted at the long-term unemployed on the low-skilled labor market: The French experience

This paper proposes a theoretical matching framework to analyze firms' and workers' response to a targeted hiring subsidy program when taking into account interactions between segments of the low-skilled labor market. By developing a general equilibrium model, the paper provides a useful tool to evaluate the aggregate effects induced on the low-skilled labor market. Then, the model is computed above French data to estimate the employment and welfare effects of a measure introduced in France in 1995, the “Initiative-for-Employment Contract”. Finally, as the framework is well-suited to investigate design issues, I analyze the efficiency of the French program as well as targeting issues.     

The effect of working time and labor force participation on unemployment: A new argument in an old debate

This paper introduces a new argument into the theoretical literature on labor market effects of changes in working hours and labor force participation. We advance a general equilibrium model in which increased labor supply reduces unskilled unemployment via consumer demand: longer work hours and higher labor force participation imply higher incomes and less (leisure) time. In consequence, home production is reduced in favor of outsourcing domestic tasks to the market, shifting consumer demand toward unskill-intensive goods. Relative demand for unskilled labor rises and unemployment falls.     

Alternative theories of wage dispersion

We analyze labor market models where the law of one price fails—i.e., models with equilibrium wage dispersion. We begin considering ex ante heterogeneous workers, but highlight a problem with this approach: If search is costly the market shuts down. We then assume homogeneous workers but ex post heterogeneous matches. This model is robust to search costs, and delivers equilibrium wage dispersion. However, we prove that the law of two prices holds: Equilibrium implies at most two wages. We explore other models, including one combining ex ante and ex post heterogeneity which is robust and delivers more realistic wage dispersion.     

The labor market and corporate structure

We analyze the impact of labor demand and labor market regulations on the corporate structure of firms. Higher wages are associated with lower monitoring, irrespective of whether these high wages are caused by labor market regulations, unions or higher labor demand. We also find that the organization of firms has important macroeconomic implications. In particular, monitoring is a type of “rent-seeking” activity and the decentralized equilibrium spends excessive resources on monitoring. Labor market regulations that reduce monitoring by pushing wages up may increase net output or reduce it only by a small amount even though they reduce employment.     

Intertemporal Choice,Saving and Investment,and Interest Rate: Contributions from a Neglected Hayekian Model

Hayek’s ‘Utility analysis and interest’ expounds a graphical model of intertemporal choice that has not received the attention it deserves. This model is important in that it can be used as a basic macroeconomic model and can therefore perform for the Austrian School the role that the Solow model plays for the standard neo-classical paradigm. This article provides an in-depth presentation of the Hayekian model, and then applies the model to key theoretical issues in macroeconomics; namely, the effects upon intertemporal equilibrium and upon the interest rate of a change in time preference, of the implementation of a technical development and of an increase in the supply of labor.     

Reform,Growth, and Inequality in China*

This paper provides a survey of the literature on inequality in China – level, change, causes, and consequences. It attempts to answer six main questions. How much has inequality risen? What is its relation to poverty alleviation? What has happened to wealth inequality? What are the main dimensions of rising income inequality? The dimensions examined are: the rural–urban divide; urban labor market reform; regional divergence; rural–urban migration; and entrepreneurship, rent‐seeking, and corruption. Was it inevitable that inequality should rise so much? Does it matter that inequality has risen? Income distribution in China is bound up with both economic reform and economic growth. This paper concludes by considering the countervailing forces that will determine the path of inequality in future years.     

Equilibrium Unemployment Rate and Customs Union

This paper utilizes the macroeconomics concept of the equilibrium rate of unemployment for theorems on free trade and the formation of customs union. The notion of an equilibrium rate of unemployment appears in the literature on labour, macroeconomics, business cycles and trade theory. Such an equilibrium rate can be derived in a number of ways, for example, by introducing labor–leisure choice in the utility functions of the workers; a labor turnover model and/or by introducing shirking. We extend the two sector-two factor Heckscher–Ohlin–Samuelson model for a small open economy by relaxing the assumption of inelastic labor supply. Specifically, we consider the classical labor supply function obtained from the representative consumer's utility maximisation problem. This consideration allows for the existence of unemployment and we analyse the effects trade policies have on the equilibrium unemployment rate. Given the movement towards free trade (either via the implementation of GATT and/or formation of customs union) it is important to examine its implications for the equilibrium rate of unemployment.     

A three state model of worker flows in general equilibrium

We develop a simple model featuring search frictions and a nondegenerate labor supply decision along the extensive margin. The model is a standard version of the neoclassical growth model with indivisible labor and idiosyncratic productivity shocks and frictions characterized by employment loss and employment opportunity arrival shocks. We argue that it is able to account for the key features of observed labor market flows for reasonable parameter values. Persistent idiosyncratic productivity shocks play a key role in allowing the model to match the persistence of the employment and out of the labor force states found in individual labor market histories.     

AN OVER‐THE‐COUNTER APPROACH TO THE FOREX MARKET

The foreign exchange (FOREX) market is an over‐the‐counter market characterized by intermediation and significant bid–ask spreads. However, most of the existing international macroeconomics literature models the FOREX as a standard Walrasian market. This article constructs a dynamic general equilibrium model of intermediation in the FOREX market. We use our framework to compute standard measures of FOREX liquidity, such as bid–ask spreads and trade volume, and study how they are affected by macroeconomic fundamentals and market microstructure. We also study how FOREX market microstructure affects the volume of international trade and, consequently, welfare. Our empirical exercise offers support to the models' main predictions.     

The welfare costs of union wage compression

This paper calculates the quantitative significance of the welfare costs of union wage compression. This is done in a dynamic general equilibrium model with overlapping generations where agents choose both schooling (human capital) and assets (physical capital). The labor market in this model is characterized as a right-to-manage contract, which allows unions to compress wage differentials between high- and low-skilled workers, by implementing a binding minimum wage. This paper shows that when labor markets are competitive even low levels of wage compression lead to large welfare losses, since wage compression creates costly unemployment among low-skilled workers. The effect of wage compression on the supply of skilled labor, however, is rather small, since the disincentive effect of a lower, high-skilled wage is, to a large extent, offset by a lower opportunity cost of schooling due to higher unemployment.     

Macroeconomic policy lessons of labor market frictions

The paper explores the consequences of macroeconomic policy for labor market outcomes in the presence of frictions. It shows how policy may be useful in over-riding frictions, as well as how it might generate adverse outcomes. A partial-equilibrium, empirically grounded model is used to simulate policy effects.The key results are that policy has effects on the stochastic behavior of key variables - measures that reduce unemployment also reduce its persistence and increase the volatility of vacancies. Hiring subsidies and unemployment benefits have substantial effects on labor market outcomes, while employment subsidies or wage tax reductions are not very effective policy instruments.     

Distributing scarce jobs and output: experimental evidence on the dynamic effects of rationing

How does the allocation of scarce jobs and production influence their supply? We present the results of a macroeconomics laboratory experiment that investigates the effects of alternative rationing schemes on economic stability. Participants play the role of worker-consumers who interact in labor and output markets. All output, which yields a reward to participants, must be produced through costly labor. Automated firms hire workers to produce output so long as there is sufficient demand for all production. In every period either output or labor hours are rationed. Random queue, equitable, and priority (i.e., property rights) rationing schemes are compared. Production volatility is the lowest under a priority rationing rule and is significantly higher under a scheme that allocates the scarce resource through a random queue. Production converges toward the steady state under a priority rule, but can diverge to significantly lower levels under a random queue or equitable rule where there is the opportunity for and perception of free-riding. At the individual level, rationing in the output market leads consumer-workers to supply less labor in subsequent periods. A model of myopic decision-making is developed to rationalize the results.     

The effects of implicit contracts on wages: Evidence from the Japanese labor market

This paper tests whether wages in Japan’s labor market are determined by current or past labor market conditions. The empirical results are consistent with a model suggesting that labor market mobility may be limited and costly in Japan for men.