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The Cyclicality of the Opportunity Cost of Employment

  • Gabriel Chodorow-Reich
  • Loukas Karabarbounis

The flow opportunity cost of moving from unemployment to employment consists of foregone public benefits and the foregone value of non-working time in units of consumption. We construct a time series of the opportunity cost of employment using detailed microdata and administrative or national accounts data to estimate benefits, consumption by employment status, and preference parameters. Our estimated opportunity cost is procyclical and volatile over the business cycle. The estimated cyclicality implies far less unemployment volatility in search and matching models of the labor market than that observed in the data. This result holds irrespective of the level of the opportunity cost or whether wages are set by Nash bargaining or by an alternating-offer bargaining process. We conclude that appealing to aspects of labor supply does not help search and matching models explain aggregate employment fluctuations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19678.

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Date of creation: Nov 2013
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Handle: RePEc:nbr:nberwo:19678
Note: EFG LS
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