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Search and Matching in the Labor Market without Unemployment Insurance

  • Francesc Obiols-Homs
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    We study the effect of market incompleteness in a search model of the labor market in which the distribution of idiosyncratic uncertainty is determined endogenously. We show that costly search introduces a wealth effect at low levels of wealth such that poor agents may find optimal not to look for a job. The combination of this effect with the usual one at higher wealth levels implies that in the long run equilibrium all agents remain out of the labor force and thus there is no production. This equilibrium is at odds with the one obtained under complete markets, and with the one obtained in other incomplete markets assuming that idiosyncratic uncertainty is "policy invariant" (or invariant to the market arrangement). We finally use numerical methods to obtain quantitative predictions in a version of the model in which only rich agents may choose not to search. The effect of the market arrangement remains dramatically large.

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    File URL: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/670.pdf
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    Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 670.

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    Date of creation: Nov 2012
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    Handle: RePEc:bge:wpaper:670
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    1. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
    2. James S. Costain & Michael Reiter, 2003. "Business Cycles, Unemployment Insurance, and the Calibration of Matching Models," CESifo Working Paper Series 1008, CESifo Group Munich.
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    4. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
    5. Albert Marcet & Francesc Obiols-Homs & Philippe Weil, 2003. "Incomplete Markets, Labor Supply and Capital Accumulation," Sciences Po publications 659, Sciences Po.
    6. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
    7. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2007. "Taxing Capital? Not a Bad Idea After All!," NBER Working Papers 12880, National Bureau of Economic Research, Inc.
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    9. Igor Livshits & James MacGee & Michele Tertilt, 2003. "Consumer bankruptcy: a fresh start," Working Papers 617, Federal Reserve Bank of Minneapolis.
    10. Krusell, Per & Mukoyama, Toshihiko & Sahin, Aysegul, 2009. "Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations," CEPR Discussion Papers 7429, C.E.P.R. Discussion Papers.
    11. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
    12. Benhabib, Jess & Bull, Clive, 1981. "Job Search: The Choice of Intensity," Working Papers 81-28, C.V. Starr Center for Applied Economics, New York University.
    13. Chamberlain, Gary & Wilson, Charles, 1984. "Optimal Intertemporal Consumption Under Uncertainty," Working Papers 84-15, C.V. Starr Center for Applied Economics, New York University.
    14. Albert Marcet & Francesc Obiols-Homs, 2006. "Polarization under incomplete markets and endogenous labor productivity," 2006 Meeting Papers 274, Society for Economic Dynamics.
    15. Krueger, Alan B. & Mueller, Andreas I., 2011. "Job Search and Job Finding in a Period of Mass Unemployment: Evidence from High-Frequency Longitudinal Data," IZA Discussion Papers 5450, Institute for the Study of Labor (IZA).
    16. Marcus Hagedorn & Iourii Manovskii, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," 2005 Meeting Papers 460, Society for Economic Dynamics.
    17. Huggett, Mark, 1997. "The one-sector growth model with idiosyncratic shocks: Steady states and dynamics," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 385-403, August.
    18. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 19 pages.
    19. Makoto Nakajima, 2012. "Business Cycles In The Equilibrium Model Of Labor Market Search And Self‐Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 399-432, 05.
    20. Gary Chamberlain & Charles A. Wilson, 2000. "Optimal Intertemporal Consumption Under Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 365-395, July.
    21. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1364-83, December.
    22. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
    23. Schechtman, Jack & Escudero, Vera L. S., 1977. "Some results on "an income fluctuation problem"," Journal of Economic Theory, Elsevier, vol. 16(2), pages 151-166, December.
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