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Is Labor Supply Important for Business Cycles?

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  • Per Krusell
  • Toshihiko Mukoyama
  • Richard Rogerson
  • Ayşegül Şahin

Abstract

We build a general equilibrium model that features uninsurable idiosyncratic shocks, search frictions and an operative labor supply choice along the extensive margin. The model is calibrated to match the average levels of gross flows across the three labor market states: employment, unemployment, and non-participation. We use it to study the implications of two kinds of aggregate shocks for the cyclical behavior of labor market aggregates and flows: shocks to search frictions (the rates of job finding and job loss) and shocks to the return on the market activity (any factors affecting aggregate productivity). We find that both kinds of shocks are needed to explain the labor market data, and that an active labor supply channel is key. A model with friction shocks only, calibrated to match unemployment fluctuations, accounts for only a small fraction of employment fluctuations and has counterfactual cyclical predictions for participation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17779.

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Date of creation: Jan 2012
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Handle: RePEc:nbr:nberwo:17779

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Cited by:
  1. Toshihiko Mukoyama, 2013. "The cyclicality of job-to-job transitions and its implications for aggregate productivity," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1074, Board of Governors of the Federal Reserve System (U.S.).
  2. Pascal Michaillat, 2012. "Fiscal Multipliers over the Business Cycle," CEP Discussion Papers, Centre for Economic Performance, LSE dp1115, Centre for Economic Performance, LSE.
  3. Tamas Papp & Alisdair McKay, 2012. "Accounting for idiosyncratic wage risk over the business cycle," 2012 Meeting Papers, Society for Economic Dynamics 820, Society for Economic Dynamics.
  4. Mankart, Jochen & Oikonomou, Rigas, 2012. "Household Search and the Aggregate Labor Market," Economics Working Paper Series 1225, University of St. Gallen, School of Economics and Political Science.
  5. Marianna Kudlyak & Felipe Schwartzman, 2012. "Accounting for unemployment in the Great Recession : nonparticipation matters," Working Paper, Federal Reserve Bank of Richmond 12-04, Federal Reserve Bank of Richmond.
  6. Didem Tuzemen, 2012. "Labor market dynamics with endogenous labor force participation and on-the-job search," Research Working Paper, Federal Reserve Bank of Kansas City RWP 12-07, Federal Reserve Bank of Kansas City.
  7. Maximiliano Dvorkin, 2013. "Sectoral Shocks, Reallocation and Unemployment in a Model of Competitive Labor Markets," 2013 Meeting Papers, Society for Economic Dynamics 1229, Society for Economic Dynamics.

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