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The Consumption-Tightness Puzzle

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Author Info
Ravn, Morten O.

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Abstract

This paper introduces a labour force participation choice into a standard labour market matching model embedded in a dynamic stochastic general equilibrium set-up. The participation choice is modelled as a trade-off between forgoing the expected benefits of being search active and engaging in costly labour market search. In contrast to models with constant labour force participation, the model that we analyse induces a symmetry in firms' and workers' search decision since both sides of the labour market vary search effort at the extensive margins. We show that this set-up is (a) of considerable analytical convenience, and (b) that the introduction of a participation choice leads to a strong tendency for procyclical unemployment, very low volatility of labour market tightness, and for a positively sloped Beveridge curve. These implications are summarized by a linear relationship between the vu-ratio and the marginal utility of consumption that we refer to as the consumption-tightness puzzle given its counterfacutal implications. Moreover, we show that this relationship survives a number of extentions of the standard model and that it derives from the allowance for an endogeneous labour market participation choice.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5670.

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Date of creation: May 2006
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Handle: RePEc:cpr:ceprdp:5670

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Related research
Keywords: homework intensive search margin labour market participation labour market tightness matching models unemployment

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. James Costain & Marcel Jansen, 2006. "Employment fluctuations with downward wage rigidity: the role of moral hazard," Banco de España Working Papers 0632, Banco de España. [Downloadable!]
  2. Den Haan, Wouter & Kaltenbrunner, Georg, 2007. "Anticipated Growth and Business Cycles in Matching Models," CEPR Discussion Papers 6063, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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