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Labor-Market Volatility in the Search-and-Matching Model: The Role of Investment-Specific Technology Shocks

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  • Renato Faccini
  • Salvador Ortigueira

Abstract

Shocks to investment-specific technology have been identified as a main source of U.S. aggregate output volatility. In this paper we assess the contribution of these shocks to the volatility of labor market variables, namely, unemployment, vacancies, tightness and the job-finding rate. Thus, our paper contributes to a recent body of literature assessing the ability of the search-and-matching model to account for the large volatility observed in labor market variables. To this aim, we solve a neoclassical economy with search and matching in the labor market, where neutral and investment-specific technologies are subject to shocks. The three key features of our model economy are: i) Firms are large, in the sense that they employ many workers. ii) Adjusting capital and labor is costly. iii) Wages are the outcome of an intra-firm Nash-bargaining problem between the firm and its workers. In our calibrated economy, we find that shocks to investment-specific technology explain 40 percent of the observed volatility in U.S. labor productivity. Moreover, these shocks generate relative volatilities in vacancies and the workers' job finding rate which match those observed in U.S. data. Relative volatilities in unemployment and labor market tightness are 55 and 75 percent of their empirical values, respectively.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2008/39.

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Date of creation: 2008
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Handle: RePEc:eui:euiwps:eco2008/39

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Keywords: Business Cycles; Labor Market Fluctuations; Investment-Specific Technical Change; Search and Matching; Adjustment Costs; Wage Bargaining.;

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Citations

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Cited by:
  1. Kaas, Leo & Kircher, Philipp, 2011. "Efficient Firm Dynamics in a Frictional Labor Market," IZA Discussion Papers 5452, Institute for the Study of Labor (IZA).
  2. Auray, Stéphane & de Blas, Beatriz, 2013. "Investment, matching and persistence in a modified cash-in-advance economy," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 591-610.
  3. Fahr Staphen & Abbritti Mirko, 2011. "Macroeconomic implications of downward wage rigidities," wp.comunite 0088, Department of Communication, University of Teramo.
  4. di Pace, Federico & Faccini, Renato, 2010. "Deep habits and the cyclical behaviour of equilibrium unemployment and vacancies," Bank of England working papers 391, Bank of England.
  5. Toledo Manuel & Silva José I, 2010. "Investment-Specific Shocks and Cyclical Fluctuations in a Frictional Labor Market," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-39, April.
  6. João Miguel Ejarque, 2009. "A Search Model with a Quasi-Network," Discussion Papers 10-23, University of Copenhagen. Department of Economics, revised Sep 2010.
  7. João Miguel Ejarque, 2010. "A search model with a quasi network," 2010 Meeting Papers 597, Society for Economic Dynamics.
  8. Mumtaz, Haroon & Zanetti, Francesco, 2012. "Neutral technology shocks and employment dynamics: results based on an RBC identification scheme," Bank of England working papers 453, Bank of England.
  9. Jo�o Miguel Ejarque, 2009. "A Search Model with a Quasi-Network," Economics Discussion Papers 665, University of Essex, Department of Economics.

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