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Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations

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Author Info
Per Krusell
Toshihiko Mukoyama
Aysegul Sahin

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Abstract

We analyze a Bewley-Huggett-Aiyagari incomplete-markets model with labor-market frictions. Consumers are subject to idiosyncratic employment shocks against which they cannot insure directly. The labor market has a Diamond-Mortensen-Pissarides structure: firms enter by posting vacancies and match with workers bilaterally, with match probabilities given by an aggregate matching function. Wages are determined through Nash bargaining. We also consider aggregate productivity shocks, and a complete set of contingent claims conditional on this risk. We use the model to evaluate a tax-financed unemployment insurance scheme. Higher insurance is beneficial for consumption smoothing, but because it raises workers' outside option value, it discourages firm entry. We find that the latter effect is more potent for welfare outcomes; we tabulate the effects quantitatively for different kinds of consumers. We also demonstrate that productivity changes in the model---in steady state as well as stochastic ones---generate rather limited unemployment effects, unless workers are close to indifferent between working and not working; thus, recent findings are corroborated in our more general setting.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15282.

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Date of creation: Aug 2009
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Handle: RePEc:nbr:nberwo:15282

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Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
J63 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Turnover; Vacancies; Layoffs
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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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. Leena Rudanko, 2008. "Aggregate and Idiosyncratic Risk in a Frictional Labor Market," Boston University - Department of Economics - Working Papers Series wp2008-009, Boston University - Department of Economics. [Downloadable!]
  2. Mark Bils & Yongsung Chang & Sun-Bin Kim, 2008. "Heterogeneity and Cyclical Unemployment," Discussion Paper Series 0805, Institute of Economic Research, Korea University. [Downloadable!]
    Other versions:
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