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The Cyclicality of the Opportunity Cost of Employment

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  • Gabriel Chodorow-Reich
  • Loukas Karabarbounis

Abstract

The flow opportunity cost of moving from unemployment to employment consists of foregone public benefits and the foregone value of non-working time in units of consumption. We construct a time series of the opportunity cost of employment using detailed microdata and administrative or national accounts data to estimate benefits, consumption by employment status, and preference parameters. Our estimated opportunity cost is procyclical and volatile over the business cycle. The estimated cyclicality implies far less unemployment volatility in search and matching models of the labor market than that observed in the data. This result holds irrespective of the level of the opportunity cost or whether wages are set by Nash bargaining or by an alternating-offer bargaining process. We conclude that appealing to aspects of labor supply does not help search and matching models explain aggregate employment fluctuations.

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Paper provided by Harvard University OpenScholar in its series Working Paper with number 126541.

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Date of creation: Jan 2014
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Handle: RePEc:qsh:wpaper:126541

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Cited by:
  1. Robert E. Hall, 2014. "Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis," NBER Working Papers 20183, National Bureau of Economic Research, Inc.
  2. Alessia Campolmi & Stefano Gnocchi, 2011. "Labor Market Participation, Unemployment and Monetary Policy," MNB Working Papers, Magyar Nemzeti Bank (the central bank of Hungary) 2011/4, Magyar Nemzeti Bank (the central bank of Hungary).
  3. Robert E. Hall, 2014. "High Discounts and High Unemployment," NBER Working Papers 19871, National Bureau of Economic Research, Inc.
  4. Robert E. Hall, 2014. "Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis," NBER Chapters, in: NBER Macroeconomics Annual 2014, Volume 29 National Bureau of Economic Research, Inc.

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