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Entry costs and labor market dynamics

  • Shao, Enchuan
  • Silos, Pedro

We study the cyclical dynamics of the value of a vacant position in labor markets characterized by search and matching frictions. We present a model of aggregate fluctuations in which firms face sunk costs to enter the production process. Our specification of sunk costs gives rise to a countercyclical value of a vacancy. We find that this overlooked object has important quantitative implications for the study of labor markets and business cycles. It affects the cyclical dynamics of the surplus division between workers and firms, and provides a better characterization of the movements in income shares over recessions and expansions. Understanding movements in the value of a vacant position helps to link the dynamics of income shares with recent volatility puzzles found in models of search and matching in labor markets.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 63 (2013)
Issue (Month): C ()
Pages: 243-255

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Handle: RePEc:eee:eecrev:v:63:y:2013:i:c:p:243-255
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  1. Ramey, Garey & Fujita, Shigeru, 2006. "Job Matching and Propagation," University of California at San Diego, Economics Working Paper Series qt53s671h7, Department of Economics, UC San Diego.
  2. Gomme, Paul & Greenwood, Jeremy, 1995. "On the cyclical allocation of risk," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 91-124.
  3. Bilbiie, Florin Ovidiu & Ghironi, Fabio & Melitz, Marc J, 2011. "Endogenous Entry, Product Variety, and Business Cycles," CEPR Discussion Papers 8564, C.E.P.R. Discussion Papers.
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  8. Enchuan Shao & Pedro Silos, 2008. "Firm entry and labor market dynamics," FRB Atlanta Working Paper 2008-17, Federal Reserve Bank of Atlanta.
  9. Pedro Silos & Enchuan Shao, 2011. "Accounting for the Cyclical Dynamics of Income Shares," 2011 Meeting Papers 1078, Society for Economic Dynamics.
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  11. Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 931-948, November.
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  19. Feenstra, Robert C., 2003. "A homothetic utility function for monopolistic competition models, without constant price elasticity," Economics Letters, Elsevier, vol. 78(1), pages 79-86, January.
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