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

Listed author(s):
  • 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
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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  1. Barron, John M & Bishop, John, 1985. "Extensive Search, Intensive Search, and Hiring Costs: New Evidence on Employer Hiring Activity," Economic Inquiry, Western Economic Association International, vol. 23(3), pages 363-382, July.
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  3. Tao Zha & Jianjun Miao & Zheng Liu, 2015. "Land Prices and Unemployment," 2015 Meeting Papers 1118, Society for Economic Dynamics.
  4. Jean-Olivier Hairault & François Langot, 2010. "Markups and the Welfare Cost of Business Cycles: A Reappraisal," Documents de travail du Centre d'Economie de la Sorbonne 10043, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  5. Nicolas Petrosky-Nadeau & Etienne Wasmer, 2013. "The Cyclical Volatility of Labor Markets under Frictional Financial Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(1), pages 193-221, January.
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  7. Nicolas Petrosky-Nadeau & Lu Zhang, "undated". "Unemployment Crises," GSIA Working Papers 2013-E5, Carnegie Mellon University, Tepper School of Business.
  8. Nicolas Petrosky-Nadeau, 2009. "Credit, Vacancies and Unemployment Fluctuations," GSIA Working Papers 2009-E27, Carnegie Mellon University, Tepper School of Business.
  9. Jordan Roulleau-Pasdeloup, 2016. "The Government Spending Multiplier in a Deep Recession," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 16.22, Université de Lausanne, Faculté des HEC, DEEP.
  10. Mumtaz, Haroon & Zanetti, Francesco, 2016. "The Effect Of Labor And Financial Frictions On Aggregate Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 20(01), pages 313-341, January.
  11. Acemoglu, Daron & Scott, Andrew, 1994. "Asymmetries in the Cyclical Behaviour of UK Labour Markets," Economic Journal, Royal Economic Society, vol. 104(427), pages 1303-1323, November.
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  16. Fabrice Collard & Patrick Fève & François Langot & Corinne Perraudin, 2002. "A structural model of US aggregate job flows," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(3), pages 197-223.
  17. Francesco Zanetti, 2015. "Financial Shocks and Labor Market Fluctuations," Economics Series Working Papers Number 746, University of Oxford, Department of Economics.
  18. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1, pages -.
  19. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
  20. Jean-Olivier Hairault, 2002. "Labor-Market Search and International Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 535-558, July.
  21. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-132, March.
  22. 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.
  23. 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.
  24. Petrosky-Nadeau, Nicolas & Zhang, Lu, 2013. "Unemployment Crises," Working Paper Series 2014-11, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  25. Jung, Philip & Kuester, Keith, 2011. "The (un)importance of unemployment fluctuations for the welfare cost of business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1744-1768, October.
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