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The Labor Market and Macro Volatility: A Nonstationary General-Equilibrium Analysis

  • Robert E. Hall

The evolution of the aggregate labor market is far from smooth. I investigate the success of a macro model in replicating the observed levels of volatility of unemployment and other key variables. I take variations in productivity growth and in exogenous product demand (government purchases plus net exports) as the primary exogenous sources of fluctuations. The macro model embodies new ideas about the labor market, all based on equilibrium %u2013 the models I consider do not rest on inefficiency in the use of labor caused by an inappropriate wage. I find that non-standard features of the labor market are essential for understanding the volatility of unemployment. These models include simple equilibrium wage stickiness, where the sticky wage is an equilibrium selection rule. A second model based on modern bargaining theory delivers a different kind of stickiness and has a unique equilibrium. A third model posits fluctuations in matching efficiency that may arise from variations over time in the information about prospective jobs among job-seekers. Reasonable calibrations of each of the three models match the observed volatility of unemployment.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11684.

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Date of creation: Oct 2005
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Publication status: published as Robert E. Hall, 2006. "The labor market and macro volatility: a nonstationary general-equilibrium analysis," Proceedings, Federal Reserve Bank of San Francisco.
Handle: RePEc:nbr:nberwo:11684
Note: EFG LS
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  1. Robert E. Hall, 1987. "Consumption," NBER Working Papers 2265, National Bureau of Economic Research, Inc.
  2. Lucas, Deborah J., 1994. "Asset pricing with undiversifiable income risk and short sales constraints: Deepening the equity premium puzzle," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 325-341, December.
  3. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  4. 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.
  5. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  6. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  7. Alexopoulos, Michelle, 2004. "Unemployment and the business cycle," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 277-298, March.
  8. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  9. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
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