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Aggregate and Idiosyncratic Risk in a Frictional Labor Market

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  • Leena Rudanko

    ()
    (Boston University, Department of Economics)

Abstract

Economists face difficulties explaining the strong cyclicality of US unemployment. This paper contributes both by developing modeling tools and evaluating a potentially important explanation. The paper develops a parsimonious equilibrium model of job search with aggregate productivity shocks, where i) workers face incomplete markets, and ii) wages are determined via optimal long-term contracts. Despite the large state space associated with long-term contracting, the equilibrium has a simple representation as a small system of differential equations. Incomplete markets amplify fluctuations in unemployment, and the results suggest an upper bound on how far they can go in explaining unemployment cyclicality.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number wp2008-009.

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Length: 47
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:bos:wpaper:wp2008-009

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Keywords: Unemployment; Wages; Business Cycles; Search; Dynamic Contracts; Incomplete Markets;

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References

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