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Heterogeneous Information and Labor Market Fluctuations

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  • Venky Venkateswaran

Abstract

I introduce dispersed information in a search and matching model of the labor market, where firms are hit by aggregate and idiosyncratic productivity shocks. The latter induce larger responses in recruiting activity than the former - because aggregate shocks have general equilibrium effects which partially offset the change in fundamentals. Informational frictions prevent firms from disentangling aggregate and idiosyncratic shocks. With Bayesian updating, firms attribute aggregate shocks largely to idiosyncratic factors, because the latter have significantly larger variances. This misattribution translates into an increased responsiveness of employment to aggregate shocks, relative to an economy with full information. I show that in a calibrated model, this channel has quantitatively significant effects and offers a potential solution to a well-known puzzle - the inability of standard search and matching models to generate sufficient volatility in labor market variables. In particular, the model with dispersed information brings the relative volatilities of employment and market tightness very close to those observed in the data.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1292.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1292

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  1. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, 02.
  2. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Econometrica, Econometric Society, vol. 70(6), pages 2295-2350, November.
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  8. James Costain & Michael Reiter, 2005. "Business Cycles, Unemployment Insurance and the Calibration of Matching Models," Working Papers 215, Barcelona Graduate School of Economics.
  9. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc.
  10. Moscarini, Giuseppe, 2004. "Limited information capacity as a source of inertia," Journal of Economic Dynamics and Control, Elsevier, vol. 28(10), pages 2003-2035, September.
  11. Graham, Liam & Wright, Stephen, 2010. "Information, heterogeneity and market incompleteness," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 164-174, March.
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  13. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2006. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Working Papers 12354, National Bureau of Economic Research, Inc.
  14. Bjoern Bruegemann & Giuseppe Moscarini, 2010. "Rent Rigidity, Asymmetric Information, and Volatility Bounds in Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 575-596, July.
  15. Venky Venkateswaran & Christian Hellwig, 2009. "Setting The Right Prices for the Wrong Reasons," 2009 Meeting Papers 260, Society for Economic Dynamics.
  16. Anton Cheremukhin, 2010. "Labor Matching Model: Putting the Pieces Together," 2010 Meeting Papers 260, Society for Economic Dynamics.
  17. Anton A. Cheremukhin & Paulina Restrepo Echavarria, 2008. "The Labor Wedge as a Matching Friction," 2008 Meeting Papers 209, Society for Economic Dynamics.
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Cited by:
  1. Rousakis, Michael, 2012. "Expectations and Fluctuations : The Role of Monetary Policy," The Warwick Economics Research Paper Series (TWERPS) 984, University of Warwick, Department of Economics.

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