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Labor-market volatility in the search-and-matching model: The role of investment-specific technology shocks

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  • Faccini, Renato
  • Ortigueira, Salvador

Abstract

Shocks to investment-specific technology have been identified as a main source of U.S. aggregate output volatility. In this paper, we present a model with frictions in the labor market and explore the contribution of these shocks to the volatility of labor market variables, namely, unemployment, vacancies, tightness and the job-finding rate. Thus, our paper contributes to a recent body of literature assessing the ability of the search-and-matching model to account for the large volatility observed in labor market variables. To this aim, we solve a neoclassical economy with search and matching, where neutral and investment-specific technologies are subject to shocks. The three key features of our model economy are: (i) Firms are large, in the sense that they employ many workers. (ii) Adjusting capital and labor is costly. (iii) Wages are the outcome of an intra-firm Nash-bargaining problem between the firm and its workers. In our calibrated economy, we find that shocks to investment-specific technology explain 40% of the observed volatility in U.S. labor productivity. Moreover, these shocks generate relative volatilities in vacancies and the workers' job finding rate which match those observed in U.S. data. Relative volatilities in unemployment and labor market tightness are 55% and 75% of their empirical values, respectively.

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  • Faccini, Renato & Ortigueira, Salvador, 2010. "Labor-market volatility in the search-and-matching model: The role of investment-specific technology shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1509-1527, August.
  • Handle: RePEc:eee:dyncon:v:34:y:2010:i:8:p:1509-1527
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    Cited by:

    1. Di Pace, F. & Faccini, R., 2012. "Deep habits and the cyclical behaviour of equilibrium unemployment and vacancies," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 183-200.
    2. Julien Albertini & Arthur Poirier, 2014. "Discount Factor Shocks and Labor Market Dynamics," SFB 649 Discussion Papers SFB649DP2014-033, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    3. João Miguel Ejarque, 2009. "A Search Model with a Quasi-Network," Discussion Papers 10-23, University of Copenhagen. Department of Economics, revised Sep 2010.
    4. Mumtaz, Haroon & Zanetti, Francesco, 2012. "Neutral technology shocks and employment dynamics: results based on an RBC identification scheme," Bank of England working papers 453, Bank of England.
    5. Leo Kaas & Philipp Kircher, 2015. "Efficient Firm Dynamics in a Frictional Labor Market," American Economic Review, American Economic Association, vol. 105(10), pages 3030-3060, October.
    6. João Miguel Ejarque, 2010. "A search model with a quasi network," 2010 Meeting Papers 597, Society for Economic Dynamics.
    7. Gubler, Matthias & Hertweck, Matthias S., 2013. "Commodity price shocks and the business cycle: Structural evidence for the U.S," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 324-352.
    8. Toledo Manuel & Silva José I, 2010. "Investment-Specific Shocks and Cyclical Fluctuations in a Frictional Labor Market," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-39, April.
    9. Auray, Stéphane & de Blas, Beatriz, 2013. "Investment, matching and persistence in a modified cash-in-advance economy," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 591-610.
    10. Ejarque, João Miguel, 2009. "A Search Model with a Quasi-Network," Economics Discussion Papers 8932, University of Essex, Department of Economics.
    11. Fahr, Stephan & Abbritti, Mirko, 2011. "Macroeconomic implications of downward wage rigidities," Working Paper Series 1321, European Central Bank.
    12. Reicher, Christopher Phillip, 2010. "Evaluating the search and matching model with sticky wages," Kiel Working Papers 1674, Kiel Institute for the World Economy (IfW).
    13. Di Pace, Federico & Villa, Stefania, 2016. "Factor complementarity and labour market dynamics," European Economic Review, Elsevier, vol. 82(C), pages 70-112.

    More about this item

    Keywords

    Search and matching Labor market fluctuations Investment-specific technology Adjustment costs Factor adjustment dynamics;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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