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Rent Rigidity, Asymmetric Information, and Volatility Bounds in Labor

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  • Bjoern Bruegemann

    (Yale University)

  • Giuseppe Moscarini

    (Yale University)

Abstract

Two thirds of US unemployment volatility is due to fluctuations in workers' job finding rate. In search and matching models, aggregate productivity shocks generate such fluctuations: through firms recruiting effort, they affect the rate at which workers and firms come into contact. Quantitatively, this mechanism has been found to be negligible in a calibrated textbook model, but also more than sufficient if wages are completely rigid. We study a weaker concept of rigidity based on worker rents (wages in excess of the value of unemployment). We show that volatility is subject to an upper bound if worker rents are weakly procyclical, thus at best rigid. Quantitatively, with Rent Rigidity, the mechanism accounts for at most 20% of the variance of the job finding rate. In light of this result we reexamine the question whether asymmetric information on gains from trade amplifies fluctuations. We analyze a series of bargaining solutions, and conclude that asymmetric information at best makes rents rigid. Our analysis provides a unifying perspective on a very lively debate. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 13 (2010)
Issue (Month): 3 (July)
Pages: 575-596

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Handle: RePEc:red:issued:08-208

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Keywords: Asymmetric information; Wage bargaining; Rent rigidity; Unemployment fluctuations; Volatility bound; Wage rigidity;

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References

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  1. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 468 - 510.
  2. John Kennan, 2006. "Private Information, Wage Bargaining and Employment Fluctuations," NBER Working Papers 11967, National Bureau of Economic Research, Inc.
  3. Michael U. Krause & Thomas A. Lubik, 2007. "On-the-job search and the cyclical dynamics of the labor market," Working Paper Series 779, European Central Bank.
  4. Murat Tasci, 2007. "On-the-job search and labor market reallocation," Working Paper 0725, Federal Reserve Bank of Cleveland.
  5. Marcus Hagedorn & Iourii Manovskii, 2011. "Productivity And The Labor Market: Comovement Over The Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(3), pages 603-619, 08.
  6. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle, Second Version," PIER Working Paper Archive 09-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Feb 2009.
  7. Robert Shimer, 2012. "Reassessing the Ins and Outs of Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 127-148, April.
  8. Bruce Fallick & Charles A. Fleischman, 2004. "Employer-to-employer flows in the U.S. labor market: the complete picture of gross worker flows," Finance and Economics Discussion Series 2004-34, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Andri Chassamboulli & Theodore Palivos, 2012. "A Search-Equilibrium Approach to the Effects of Immigration on Labor Market Outcomes," University of Cyprus Working Papers in Economics 17-2012, University of Cyprus Department of Economics.
  2. Yaniv Yedid-Levi, 2012. "Why Does Employment in All Major Sectors Move Together over the Business Cycle?," 2012 Meeting Papers 677, Society for Economic Dynamics.
  3. Mark Bils & Yongsung Chang & Sun-Bin Kim, 2011. "Worker Heterogeneity and Endogenous Separations in a Matching Model of Unemployment Fluctuations," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 128-54, January.
  4. Venky Venkateswaran, 2011. "Heterogeneous Information and Labor Market Fluctuations," 2011 Meeting Papers 1292, Society for Economic Dynamics.

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