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Search and Matching in the Labor Market without Unemployment Insurance

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  • Francesc Obiols
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    Abstract

    We study the effect of market incompleteness in a search model of the labor market in which the distribution of idiosyncratic uncertainty is determined endogenously. We show that costly search introduces a wealth effect at low levels of wealth such that poor agents may find optimal not to look for a job. The combination of this effect with the usual one at higher wealth levels implies that in the long run equilibrium all agents remain out of the labor force and thus there is no production. This equilibrium is at odds with the one obtained under complete markets, and with the one obtained in other incomplete markets assuming that idiosyncratic uncertainty is "policy invariant" (or invariant to the market arrangement). We finally use numerical methods to obtain quantitative predictions in a version of the model in which only rich agents may choose not to search. The effect of the market arrangement remains dramatically large.

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    Bibliographic Info

    Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 670.

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    Date of creation: Nov 2012
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    Handle: RePEc:bge:wpaper:670

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    Related research

    Keywords: search; incomplete markets; general equilibrium;

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    1. Costain, James S. & Reiter, Michael, 2008. "Business cycles, unemployment insurance, and the calibration of matching models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 32(4), pages 1120-1155, April.
    2. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers, Federal Reserve Bank of Minneapolis 502, Federal Reserve Bank of Minneapolis.
    3. Benhabib, Jess & Bull, Clive, 1983. "Job Search: The Choice of Intensity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(5), pages 747-64, October.
    4. Per Krusell & Toshihiko Mukoyama & Ayseg ul Sahin, 2007. "Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations," Levine's Bibliography 122247000000001783, UCLA Department of Economics.
    5. Gary Chamberlain & Charles A. Wilson, 2000. "Optimal Intertemporal Consumption Under Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 365-395, July.
    6. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers, Centre for Economic Performance, LSE dp0110, Centre for Economic Performance, LSE.
    7. Igor Livshits & James MacGee & Mich�le Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, American Economic Association, vol. 97(1), pages 402-418, March.
    8. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
    9. Francesc Obiols-Homs & Albert Marcet, 2009. "Polarization under incomplete markets and endogenous labor productivity," 2009 Meeting Papers, Society for Economic Dynamics 356, Society for Economic Dynamics.
    10. Krueger, Alan B. & Mueller, Andreas I., 2011. "Job Search and Job Finding in a Period of Mass Unemployment: Evidence from High-Frequency Longitudinal Data," IZA Discussion Papers 5450, Institute for the Study of Labor (IZA).
    11. Marcus Hagedorn & Iourii Manovskii, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," 2005 Meeting Papers, Society for Economic Dynamics 460, Society for Economic Dynamics.
    12. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2007. "Taxing Capital? Not a Bad Idea After All!," NBER Working Papers 12880, National Bureau of Economic Research, Inc.
    13. Gomes, Joao & Greenwood, Jeremy & Rebelo, Sergio, 2001. "Equilibrium unemployment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(1), pages 109-152, August.
    14. Huggett, Mark, 1997. "The one-sector growth model with idiosyncratic shocks: Steady states and dynamics," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(3), pages 385-403, August.
    15. Albert Marcet & Francesc Obiols-Homs & Philippe Weil, 2007. "Incomplete Markets, Labor Supply and Capital Accumulation," Sciences Po publications info:hdl:2441/8623, Sciences Po.
    16. Makoto Nakajima, 2010. "Business cycles in the equilibrium model of labor market search and self-insurance," Working Papers 10-24, Federal Reserve Bank of Philadelphia.
    17. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 112-32, March.
    18. Schechtman, Jack & Escudero, Vera L. S., 1977. "Some results on "an income fluctuation problem"," Journal of Economic Theory, Elsevier, Elsevier, vol. 16(2), pages 151-166, December.
    19. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 309-327, November.
    20. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(6), pages 1364-83, December.
    21. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(2), pages 269-300, November.
    22. Athreya, Kartik B., 2002. "Welfare implications of the Bankruptcy Reform Act of 1999," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(8), pages 1567-1595, November.
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