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The Aggregate Effects of Labor Market Frictions

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Abstract

Labor market frictions are able to induce sluggish aggregate employment dynamics. However, these frictions have strong implications for the source of this propagation: They distort the path of aggregate employment by impeding the flow of labor across firms. For a canonical class of frictions, we show how observable measures of such flows can be used to assess the effect of frictions on aggregate employment dynamics. Application of this approach to establishment microdata for the United States reveals that the empirical flow of labor across firms deviates markedly from the predictions of canonical labor market frictions. Despite their ability to induce persistence in aggregate employment, firm-size flows in these models are predicted to respond aggressively to aggregate shocks but react sluggishly in the data. This paper therefore concludes that the propagation mechanism embodied in standard models of labor market frictions fails to account for the sources of observed employment dynamics.

Suggested Citation

  • Michael Elsby & Ryan Michaels & David Ratner, 2017. "The Aggregate Effects of Labor Market Frictions," Working Papers 17-40, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:17-40
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    File URL: https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2017/wp17-40.pdf
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    Cited by:

    1. Bjoern Bruegemann, 2023. "Invariance of Unemployment and Vacancy Dynamics with Respect to Diminishing Returns to Labor at the Firm Level," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 915-942, December.
    2. Fatih Karahan & Benjamin Pugsley & Aysegül Sahin, 2019. "Demographic Origins of the Startup Deficit," Working Papers 19-21, Center for Economic Studies, U.S. Census Bureau.

    More about this item

    Keywords

    Labor market frictions; firm dynamics; adjustment costs;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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