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Welfare Cost of Fluctuations: when Labor Market Search Interacts with Financial Frictions

  • Eleni Iliopulos

    ()

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, CEPREMAP - Centre pour la recherche économique et ses applications)

  • François Langot

    ()

    (GAINS-TEPP - UM - Université du Maine, Banque de France - Banque de France - Banque de France, IZA - Institute for the Study of Labor, PSE - Paris School of Economics)

  • Thepthida Sopraseuth

    ()

    (CEPREMAP - Centre pour la recherche économique et ses applications, THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique)

We provide a quantitative assessment of welfare costs of fluctuations in a search model with financial frictions. The matching process in the labor market leads positive shocks to reduce unemployment less than negative shocks increase it. We show that the magnitude of this non-linearity is magnified frictions. This asymmetric effect of the business cycle leads to sizable welfare costs. The model also accounts for the responsiveness of the job finding rate to the business cycle as financial frictions endogenously generate counter-cyclical opportunity costs of opening a vacancy and wage sluggishness.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-01020872.

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Date of creation: Jun 2014
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Publication status: Published in Documents de travail du Centre d'Economie de la Sorbonne 2014.42 - ISSN : 1955-611X. 2014
Handle: RePEc:hal:cesptp:halshs-01020872
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01020872
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  19. Acemoglu, Daron & Scott, Andrew, 1994. "Asymmetries in the Cyclical Behaviour of UK Labour Markets," Economic Journal, Royal Economic Society, vol. 104(427), pages 1303-23, November.
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  23. Arnaud Cheron & Francois Langot, 2004. "Labor Market Search and Real Business Cycles: Reconciling Nash Bargaining with the Real Wage Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 476-493, April.
  24. Tom Krebs, 2003. "Growth and Welfare Effects of Business Cycles in Economies with Idiosyncratic Human Capital Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 846-868, October.
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