Working Paper: NBER ID: w13871
Authors: Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Aysegul Sahin
Abstract: This paper analyzes a model that features frictions, an operative labor supply margin, and incomplete markets. We first provide analytic solutions to a benchmark model that includes indivisible labor and incomplete markets in the absence of trading frictions. We show that the steady state levels of aggregate hours and aggregate capital stock are identical to those obtained in the economy with employment lotteries, while individual employment and asset dynamics can be different. Second, we introduce labor market frictions to the benchmark model. We find that the effect of the frictions on the response of aggregate hours to a permanent tax change is highly non-linear. We also find that there is considerable scope for substitution between "voluntary" and "frictional" nonemployment in some situations.
Keywords: Labor Market Frictions; Indivisible Labor; Incomplete Markets; Tax Changes
JEL Codes: E2; J2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor market frictions (J29) | Response of aggregate hours to permanent tax change (H31) |
| Presence of frictions (D59) | Impact on response of aggregate hours to tax changes (H31) |
| Frictional nonemployment increase (J69) | Steady-state equilibrium employment (J69) |
| Tax reductions beyond threshold (H23) | Response of aggregate hours (J22) |
| Initial equilibrium (D50) | Effect of frictions on labor supply decisions (J29) |
| Individual employment histories and asset dynamics (D14) | Aggregate labor market outcomes (E24) |