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Labor supply in a frictional labor market

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Author Info

  • Toshihiko Mukoyama

    (University of Virginia)

  • Richard Rogerson

    (Arizona State University)

  • Aysegul Sahin

    (Federal Reserve Bank of New York)

  • Per Krusell

    (Princeton University)

Abstract

We develop a model featuring search frictions and a nondegenerate labor supply decision along the extensive margin, and argue that it does a reasonable job of matching labor market flows between employment, unemployment and out of the labor force. Persistent idiosyncratic productivity shocks play a key role in allowing the model to match the persistence of the employment and out of the labor force states found in individual labor market histories. We then use this model to address two questions: how do taxes affect aggregate employment and how do changes in frictions affect aggregate employment. We find that the presence of empirically plausible frictions has virtually no impact on the response of aggregate employment to taxes. The labor supply response present in our model greatly attenuates the employment response to frictions relative to the simplest matching model.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 54.

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Date of creation: 2009
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Handle: RePEc:red:sed009:54

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References

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  1. Matthew Gray & Alexandra Heath & Boyd Hunter, 2005. "The Labour Force Dynamics Of The Marginally Attached ," Australian Economic Papers, Wiley Blackwell, vol. 44(1), pages 1-14, 03.
  2. Josep Pijoan-Mas, 2003. "Precautionary Savings Or Working Longer Hours?," Working Papers wp2003_0311, CEMFI.
  3. Stephen R. G. Jones & W. Craig Riddell, 1999. "The Measurement of Unemployment: An Empirical Approach," Econometrica, Econometric Society, vol. 67(1), pages 147-162, January.
  4. Andolfatto, David & Gomme, Paul, 1996. "Unemployment insurance and labor-market activity in Canada," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 47-82, June.
  5. Per Krusell & Toshihiko Mukoyama & Richard Rogerson & Aysegul Sahin, 2008. "Aggregate Implications of Indivisible Labor, Incomplete Markets, and Labor Market Frictions," NBER Working Papers 13871, National Bureau of Economic Research, Inc.
  6. Elisabetta Marzano, 2006. "How Many Labour Force States? An Analysis Based on the British Household Panel Survey (BHPS)," LABOUR, CEIS, vol. 20(2), pages 237-254, 06.
  7. Poterba, James M & Summers, Lawrence H, 1986. "Reporting Errors and Labor Market Dynamics," Econometrica, Econometric Society, vol. 54(6), pages 1319-38, November.
  8. David Andolfattio & Paul Gomme & Paul A. Storer, 1998. "US Labour Market Policy and the Canada-US Unemployment Rate Gap," Canadian Public Policy, University of Toronto Press, vol. 24(s1), pages 210-232, February.
  9. Andrea Brandolini & Piero Cipollone & Eliana Viviano, 2004. "Does the ILO Definition Capture All Unemployment?," Temi di discussione (Economic working papers) 529, Bank of Italy, Economic Research and International Relations Area.
  10. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  11. Yongsung Chang & Sun-Bin Kim, 2003. "From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous Agent Macroeconomy," Macroeconomics 0307003, EconWPA.
  12. Pries, Michael & Rogerson, Richard, 2009. "Search frictions and labor market participation," European Economic Review, Elsevier, vol. 53(5), pages 568-587, July.
  13. Garibaldi, Pietro & Wasmer, Etienne, 2003. "Equilibrium Search Unemployment, Endogenous Participation and Labour Market Flows," CEPR Discussion Papers 3986, C.E.P.R. Discussion Papers.
  14. Garrido, Luis & Toharia, Luis, 2004. "What does it take to be (counted as) unemployed? The case of Spain," Labour Economics, Elsevier, vol. 11(4), pages 507-523, August.
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Cited by:
  1. Sanjay Chugh & Christian Merkl, 2011. "Efficiency in a Model of Labor Selection," Kiel Working Papers 1684, Kiel Institute for the World Economy.
  2. Moon, Weh-Sol, 2009. "Endogenous Labor Force Participation and Firing Costs," MPRA Paper 15749, University Library of Munich, Germany.

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