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Aggregate Implications of Indivisible Labor, Incomplete Markets, and Labor Market Frictions

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  • Per Krusell
  • Toshihiko Mukoyama
  • Richard Rogerson
  • Aysegul Sahin

Abstract

This paper analyzes a model that features frictions, an operative labor supply margin, and incomplete markets. We first provide analytic solutions to a benchmark model that includes indivisible labor and incomplete markets in the absence of trading frictions. We show that the steady state levels of aggregate hours and aggregate capital stock are identical to those obtained in the economy with employment lotteries, while individual employment and asset dynamics can be different. Second, we introduce labor market frictions to the benchmark model. We find that the effect of the frictions on the response of aggregate hours to a permanent tax change is highly non-linear. We also find that there is considerable scope for substitution between "voluntary" and "frictional" nonemployment in some situations.

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  • Per Krusell & Toshihiko Mukoyama & Richard Rogerson & Aysegul Sahin, 2008. "Aggregate Implications of Indivisible Labor, Incomplete Markets, and Labor Market Frictions," NBER Working Papers 13871, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13871
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    Cited by:

    1. Per Krusell & Jonna Olsson & Timo Boppart, 2017. "Labor Supply in the Future: Who Will Work?," 2017 Meeting Papers 157, Society for Economic Dynamics.
    2. Per Krusell & Toshihiko Mukoyama & Ayşegül Şahin, 2010. "Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1477-1507.
    3. Hamish Low & Costas Meghir & Luigi Pistaferri, 2010. "Wage Risk and Employment Risk over the Life Cycle," American Economic Review, American Economic Association, vol. 100(4), pages 1432-1467, September.
    4. Charles Gottlieb & Maren Froemel, 2015. "General Equilibrium Effects of Targeted Transfers: The case of EITC," 2015 Meeting Papers 1264, Society for Economic Dynamics.
    5. Sekyu Choi & Alexandre Janiak & Benjamín Villena‐Roldán, 2015. "Unemployment, Participation and Worker Flows Over the Life‐Cycle," Economic Journal, Royal Economic Society, vol. 125(589), pages 1705-1733, December.
    6. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
    7. Alonso-Ortiz, Jorge, 2014. "Social security and retirement across the OECD," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 300-316.
    8. Gottlieb, Charles & Froemel, Maren, 2015. "General Equilibrium Effects of Targeted Transfers: The case of the Earned Income Tax Credit (EITC)," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113175, Verein für Socialpolitik / German Economic Association.
    9. Toshihiko Mukoyama & Richard Rogerson & Aysegul Sahin & Per Krusell, 2009. "Labor supply in a frictional labor market," 2009 Meeting Papers 54, Society for Economic Dynamics.
    10. Jose Mustre-del-Rio & William Hawkins, 2012. "Financial Frictions and Occupational Mobility," 2012 Meeting Papers 1123, Society for Economic Dynamics.
    11. Christiano, Lawrence & Trabandt, Mathias & Walentin, Karl, 2010. "Involuntary unemployment and the business cycle," Working Paper Series 1202, European Central Bank.
    12. Michael Keane & Richard Rogerson, 2015. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 89-117, August.
    13. Krusell, Per & Mukoyama, Toshihiko & Rogerson, Richard & Sahin, Aysegül, 2011. "A three state model of worker flows in general equilibrium," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1107-1133, May.
    14. Janiak, Alexandre & Santos Monteiro, Paulo, 2016. "Towards a quantitative theory of automatic stabilizers: The role of demographics," Journal of Monetary Economics, Elsevier, vol. 78(C), pages 35-49.
    15. Christian BAYER & Klaus WALDE, 2010. "Matching and Saving in Continuous Time: Theory," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2010013, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    16. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2010. "DSGE Models for Monetary Policy Analysis," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 7, pages 285-367 Elsevier.
    17. Per Krusell & Toshihiko Mukoyama & Richard Rogerson & Ayşegül Şahin, 2010. "Aggregate labor market outcomes: The roles of choice and chance," Quantitative Economics, Econometric Society, vol. 1(1), pages 97-127, July.
    18. Alonso-Ortiz, Jorge & Rogerson, Richard, 2010. "Taxes, transfers and employment in an incomplete markets model," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 949-958, November.
    19. repec:eee:moneco:v:90:y:2017:i:c:p:142-157 is not listed on IDEAS
    20. Yongsung Chang & Sun-Bin Kim & Frank Schorfheide, 2010. "Labor-Market Heterogeneity, Aggregation, and the Lucas Critique," RCER Working Papers 556, University of Rochester - Center for Economic Research (RCER).
    21. Galina Vereshchagina, 2014. "Preferences for Risk in Dynamic Models with Adjustment Costs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 86-106, January.

    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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