Working Paper: CEPR ID: DP11076
Authors: Eran Yashiv
Abstract: U.S. CPS data indicate that in recessions firms actually increase their hiring rates from the pools of the unemployed and out of the labor force. Why so? The paper provides an explanation by studying the optimal recruiting behavior of the representative firm. The model combines labor frictions, of the search and matching type, with capital frictions, of the q-model type. Optimal firm behavior is a function of the value of jobs, i.e., the expected present value of the marginal worker to the firm. These are estimated to be counter-cyclical, the underlying reason being the dynamic behavior of the labor share of GDP. The counter-cyclicality of hiring rates and job values, which may appear counter-intuitive, is shown to be consistent with well-known business cycle facts. The analysis emphasizes the difference between current labor productivity and the wider, forward-looking concept of job values. The paper explains the high volatility of firm recruiting behavior, as well as the reduction over time in labor market fluidity in the U.S., using the same estimated model. Part of the explanation has to do with job values and another part with the interaction of hiring and investment costs, both determinants having been typically overlooked.
Keywords: aggregate hiring; business cycles; capital market frictions; job values; labor market fluidity; labor market frictions; vacancies; volatility
JEL Codes: E24; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| job values (A13) | hiring rates from nonemployment (J63) |
| job values (A13) | hiring rates from employment (job-to-job flows) (J63) |
| job values (A13) | vacancy rates (R33) |
| hiring rates from nonemployment (J63) | hiring rates from employment (job-to-job flows) (J63) |
| job values (A13) | labor share in GDP (E25) |
| labor share in GDP (E25) | hiring rates from nonemployment (J63) |
| job values (A13) | capital investment behavior (G31) |
| capital investment behavior (G31) | vacancy rates (R33) |