Title: Aggregate labor market outcomes: The roles of choice and chance
Abstract: Quantitative EconomicsVolume 1, Issue 1 p. 97-127 Open Access Aggregate labor market outcomes: The roles of choice and chance Per Krusell, Per Krusell IIES, CAERP, CEPR, and NBER; [email protected] Some of the material in this paper was previously contained in our paper titled “Labor supply in a frictional labor market.” We thank the editor, Nicola Pavoni, Naoki Shintoyo, and two anonymous referees for useful comments, as well as seminar participants at CEMFI, Columbia, Universitat Autonoma de Barcelona, USC, UCLA, the Atlanta Fed, Yale, UC Riverside, Queen's, Georgetown, Wharton, Toronto, Ryerson, Western Ontario, Stockholm School of Economics, IIES, University of Oslo, Concordia, Northern Illinois, Yonsei University, Korea University, Ohio State, Notre Dame, Penn State, Indiana, Maryland, and George Washington, as well as conference participants at the Labor Markets Conference at the IFS (2008), the Winter Institute of Macroeconomics 2009 (Tokyo), the Bewley Conference at UT Austin, and the 2009 SED Conference. We thank Joe Song for excellent research assistance. Krusell thanks the NSF for financial support, Mukoyama thanks the Bankard Fund for Political Economy for financial support, and Rogerson thanks the NSF and the Korean Science Foundation (WCU-R33-10005) for financial support. The views expressed in this article are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.Search for more papers by this authorToshihiko Mukoyama, Toshihiko Mukoyama University of Virginia and CIREQ; [email protected]Search for more papers by this authorRichard Rogerson, Richard Rogerson Arizona State University and NBER; [email protected]Search for more papers by this authorAyşegül Şahin, Ayşegül Şahin Federal Reserve Bank of New York; [email protected]Search for more papers by this author Per Krusell, Per Krusell IIES, CAERP, CEPR, and NBER; [email protected] Some of the material in this paper was previously contained in our paper titled “Labor supply in a frictional labor market.” We thank the editor, Nicola Pavoni, Naoki Shintoyo, and two anonymous referees for useful comments, as well as seminar participants at CEMFI, Columbia, Universitat Autonoma de Barcelona, USC, UCLA, the Atlanta Fed, Yale, UC Riverside, Queen's, Georgetown, Wharton, Toronto, Ryerson, Western Ontario, Stockholm School of Economics, IIES, University of Oslo, Concordia, Northern Illinois, Yonsei University, Korea University, Ohio State, Notre Dame, Penn State, Indiana, Maryland, and George Washington, as well as conference participants at the Labor Markets Conference at the IFS (2008), the Winter Institute of Macroeconomics 2009 (Tokyo), the Bewley Conference at UT Austin, and the 2009 SED Conference. We thank Joe Song for excellent research assistance. Krusell thanks the NSF for financial support, Mukoyama thanks the Bankard Fund for Political Economy for financial support, and Rogerson thanks the NSF and the Korean Science Foundation (WCU-R33-10005) for financial support. The views expressed in this article are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.Search for more papers by this authorToshihiko Mukoyama, Toshihiko Mukoyama University of Virginia and CIREQ; [email protected]Search for more papers by this authorRichard Rogerson, Richard Rogerson Arizona State University and NBER; [email protected]Search for more papers by this authorAyşegül Şahin, Ayşegül Şahin Federal Reserve Bank of New York; [email protected]Search for more papers by this author First published: 03 August 2010 https://doi.org/10.3982/QE7Citations: 22 AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Abstract Commonly used frictional models of the labor market imply that changes in frictions have large effects on steady state employment and unemployment. We use a model that features both frictions and an operative labor supply margin to examine the robustness of this feature to the inclusion of an empirically reasonable labor supply channel. The response of unemployment to changes in frictions is similar in both models, but the labor supply response present in our model greatly attenuates the effects of frictions on steady state employment relative to the simplest matching model and two common extensions. We also find that the presence of empirically plausible frictions has virtually no impact on the response of aggregate employment to taxes. References Alvarez, F. and M. Veracierto (1999), “ Labor-market policies in an equilibrium search model.” In NBER Macroeconomics Annual 1999 ( B. Bernanke and J. Rotemberg, eds.), 265– 304, MIT Press, Cambridge , Massachusetts . Andolfatto, D., P. Gomme, and P. Storer (1998), “US labour market policy and the Canada–US unemployment rate gap. Canadian Public Policy—Analyse de Politiques, 24, 210– 232. DOI: 10.2307/3551943 Budria Rodriguez, S., J. Diaz-Gimenez, V. Quadrini, and J. Rios-Rull (2002), “Updated facts on the U.S. distributions of earnings, income, and wealth. Quarterly Review of the Federal Reserve Bank of Minneapolis, 26 (3), 2– 35. Castaneda, A., J. Diaz-Jimenez, and J. Rios-Rull (2003), “Accounting for U.S. earnings and wealth inequality. Journal of Political Economy, 111, 818– 857. DOI: 10.1086/375382 Chang, Y. and S. Kim (2006), “From individual to aggregate labor supply: A quantitative analysis based on a heterogeneous agent macroeconomy. International Economic Review, 47, 1– 27. DOI: 10.1111/j.1468-2354.2006.00370.x Chang, Y. and S. Kim (2007), “Heterogeneity and aggregation: Implications for labor market fluctuations. American Economic Review, 97, 1939– 1956. DOI: 10.1257/aer.97.5.1939 Domeij, D. and M. Floden (2006), “The labor supply elasticity and borrowing constraints: Why estimates are biased. Review of Economic Dynamics, 9, 242– 262. DOI: 10.1016/j.red.2005.11.001 Floden, M. and J. Linde (2001), “Idiosyncratic risk in the United States and Sweden: Is there a role for government insurance? Review of Economic Dynamics, 4, 406– 437. DOI: 10.1006/redy.2000.0121 Garibaldi, P. and E. Wasmer (2005), “Equilibrium search unemployment, endogenous participation, and labor market flows. Journal of European Economic Association, 3, 851– 882. DOI: 10.1162/1542476054430807 Hall, R. (2009), “Reconciling cyclical movements in the marginal value of time and the marginal product of labor. Journal of Political Economy, 117, 282– 323. DOI: 10.1086/599022 Jones, S. and C. Riddell (1999), “The measurement of unemployment: An empirical approach. Econometrica, 67, 147– 161. DOI: 10.1111/1468-0262.00007 Jones, S. and C. Riddell (2006), “Unemployment and non-employment: Heterogeneities in labour market states. Review of Economics and Statistics, 88, 314– 323. DOI: 10.1162/rest.88.2.314 Krusell, P., T. Mukoyama, R. Rogerson, and A. Şahin (2008), “Aggregate implications of indivisible labor, incomplete markets, and labor market frictions. Journal of Monetary Economics, 55, 961– 979. DOI: 10.1016/j.jmoneco.2008.03.008 Krusell, P., T. Mukoyama, R. Rogerson, and A. Şahin (2009), “ A three state model of worker flows in general equilibrium.” Working Paper 15251, NBER. Krusell, P., T. Mukoyama, and A. Şahin (forthcoming), “Labor-market matching with precautionary savings and aggregate fluctuations. Review of Economic Studies. Krusell, P. and A. Smith, Jr. (1998), “Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy, 106, 867– 896. DOI: 10.1086/250034 Kydland, F. and E. Prescott (1982), “Time to build and aggregate fluctuations. Econometrica, 50, 1345– 1370. DOI: 10.2307/1913386 Ljungqvist, L. and T. Sargent (2006), “ Do taxes explain European employment?: Indivisible labour, human capital, lotteries and savings.” In NBER Macroeconomics Annual 2006 ( D. Acemoglu and K. Rogoff, eds.), 181– 224, MIT Press, Cambridge , Massachusetts . Ljungqvist, L. and T. Sargent (2008), “Taxes, benefits, and careers: Complete versus incomplete markets. Journal of Monetary Economics, 55, 98– 125. DOI: 10.1016/j.jmoneco.2007.10.003 Low, H. (2005), “Self insurance in a life cycle model of labor supply and saving. Review of Economic Dynamics, 8, 945– 975. DOI: 10.1016/j.red.2005.03.002 Low, H., C. Meghir, and L. Pistaferri (forthcoming), “Employment risk and wage risk over the life cycle. American Economic Review. McDaniel, C. (2006), “ Effective tax rates for 15 OECD countries: 1950–2003.” Mimeo, Arizona State University . Mendoza, E., A. Razin, and L. Tesar (1994), “Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption. Journal of Monetary Economics, 34, 297– 323. DOI: 10.1016/0304-3932(94)90021-3 Merz, M. (1995), “Search in the labor market and the real business cycle. Journal of Monetary Economics, 36, 269– 300. DOI: 10.1016/0304-3932(95)01216-8 Mortensen, D. and C. Pissarides (1994), “Job creation and job destruction in the theory of unemployment. Review of Economic Studies, 61, 397– 415. DOI: 10.2307/2297896 Pijoan-Mas, J. (2006), “Precautionary savings or working longer hours. Review of Economic Dynamics, 9, 326– 352. DOI: 10.1016/j.red.2005.11.002 Pissarides, C. (1985), “Short-run equilibrium dynamics of unemployment, vacancies, and real wages. American Economic Review, 75, 676– 690. Pissarides, C. (2000), Equilibrium Unemployment Theory, second edition. MIT Press, Cambridge , Massachusetts . Prescott, E. (2004), “Why do Americans work so much more than Europeans? Quarterly Review of the Federal Reserve Bank of Minneapolis, 28 (1), 2– 13. Tauchen, G. (1986), “Finite state Markov-chain approximations to univariate and vector autoregressions. Economics Letters, 20, 177– 181. DOI: 10.1016/0165-1765(86)90168-0 Citing Literature Volume1, Issue1July 2010Pages 97-127 ReferencesRelatedInformation