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The Cyclicality of the Opportunity Cost of Employment

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  • Loukas Karabarbounis

    (University of Chicago)

  • Gabriel Chodorow-Reich

    (Harvard University)

Abstract

The flow opportunity cost of moving from unemployment to employment consists of foregone public benefits and foregone utility from non-working time relative to consumption. Recent research uses a relatively high opportunity cost to generate volatile unemployment fluctuations in search and matching models of the labor market. We argue that not only the level but also the cyclicality of the opportunity cost matters. Using detailed microdata, administrative data, and the structure of the search and matching model with concave and non-separable preferences, we document that the opportunity cost of employment is as procyclical as and more volatile than the marginal product of employment in the data. With our estimated cyclicality of the opportunity cost, the volatility of unemployment is essentially neutral with respect to the level of the opportunity cost, and far smaller than the volatility of unemployment in the data. We conclude that appealing to aspects of labor supply does not help search and matching models explain aggregate employment fluctuations.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2014 Meeting Papers with number 88.

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Date of creation: 2014
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Handle: RePEc:red:sed014:88

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References

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  1. James Costain & Michael Reiter, 2005. "Business Cycles, Unemployment Insurance and the Calibration of Matching Models," Working Papers 215, Barcelona Graduate School of Economics.
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  4. Pistaferri, Luigi, 2002. "Anticipated and Unanticipated Wage Changes, Wage Risk, and Intertemporal Labour Supply," CEPR Discussion Papers 3628, C.E.P.R. Discussion Papers.
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  6. Mathias Trabandt & Harald Uhlig, 2009. "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," NBER Working Papers 15343, National Bureau of Economic Research, Inc.
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  15. Mark Aguiar & Erik Hurst, 2005. "Consumption versus Expenditure," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 919-948, October.
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  17. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
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Cited by:
  1. Alessia Campolmi & Stefano Gnocchi, 2014. "Labor Market Participation, Unemployment and Monetary Policy," Working Papers 14-9, Bank of Canada.
  2. Robert E. Hall, 2014. "High Discounts and High Unemployment," NBER Working Papers 19871, National Bureau of Economic Research, Inc.
  3. 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.
  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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