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Efficiency in a Model of Labor Selection

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  • Sanjay Chugh
  • Christian Merkl

Abstract

We characterize efficient allocations and business cycle fluctuations in a labor selection model. Due to forward-looking hiring and labor supply decisions, efficiency entails both static and intertemporal margins. We develop welfare-relevant measures of marginal rates of transformation and efficiency along each margin that nest their counterparts in frictionless labor markets. In a calibrated version of the model, efficient fluctuations feature highly volatile unemployment and job-finding rates, in line with empirical evidence. We show analytically in a simplified version of the model that volatility arises from selection effects, rather than general equilibrium effects. We also develop sufficient conditions on wages, which are independent of the wage-determination process, that decentralize efficient allocations. Unlike the Hosios condition for matching models, there is no simple restriction on Nash bargaining that guarantees that Nash wages can support efficient allocations. Cyclical fluctuations in the Nash-bargaining economy display even larger amplification of productivity shocks into labor market outcomes than in the efficient economy, without extreme assumptions about bargaining shares, inflexibility of wages, or the size of surpluses that govern labor demand. The results establish normative and positive foundations for DSGE labor selection models

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1684.

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Length: 64 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:kie:kieliw:1684

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Keywords: labor market frictions; efficiency; amplification; selection;

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  1. Marcus Hagedorn & Iourii Manovskii, 2007. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," IEW - Working Papers 351, Institute for Empirical Research in Economics - University of Zurich.
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  16. Toshihiko Mukoyama & Richard Rogerson & Aysegul Sahin & Per Krusell, 2009. "Labor supply in a frictional labor market," 2009 Meeting Papers 54, Society for Economic Dynamics.
  17. Barron, John M & Bishop, John & Dunkelberg, William C, 1985. "Employer Search: The Interviewing and Hiring of New Employees," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 43-52, February.
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  20. Monique Ebell, 2008. "Resurrecting the Participation Margin," CEP Discussion Papers dp0873, Centre for Economic Performance, LSE.
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  1. Efficiency in a Model of Labor Selection
    by Christian Zimmermann in NEP-DGE blog on 2011-03-21 02:28:55

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