Working Paper: NBER ID: w17779
Authors: Per Krusell; Toshihiko Mukoyama; Richard Rogerson; Ayegl Ahin
Abstract: We build a general equilibrium model that features uninsurable idiosyncratic shocks, search frictions and an operative labor supply choice along the extensive margin. The model is calibrated to match the average levels of gross flows across the three labor market states: employment, unemployment, and non-participation. We use it to study the implications of two kinds of aggregate shocks for the cyclical behavior of labor market aggregates and flows: shocks to search frictions (the rates of job finding and job loss) and shocks to the return on the market activity (any factors affecting aggregate productivity). We find that both kinds of shocks are needed to explain the labor market data, and that an active labor supply channel is key. A model with friction shocks only, calibrated to match unemployment fluctuations, accounts for only a small fraction of employment fluctuations and has counterfactual cyclical predictions for participation.
Keywords: Labor Supply; Business Cycles; Macroeconomics
JEL Codes: E24; J22; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shocks to search frictions (D83) | employment fluctuations (J63) |
| shocks to market activity returns (G17) | employment fluctuations (J63) |
| labor supply decisions (J22) | aggregate employment outcomes (E24) |
| job offer arrival rates (J63) | unemployment fluctuations (J64) |
| search frictions (F12) | employment fluctuations (J63) |
| participation decisions (D70) | employment fluctuations (J63) |