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Labor supply in a frictional labor market

  • Toshihiko Mukoyama

    (University of Virginia)

  • Richard Rogerson

    (Arizona State University)

  • Aysegul Sahin

    (Federal Reserve Bank of New York)

  • Per Krusell

    (Princeton University)

We develop a model featuring search frictions and a nondegenerate labor supply decision along the extensive margin, and argue that it does a reasonable job of matching labor market flows between employment, unemployment and out of the labor force. Persistent idiosyncratic productivity shocks play a key role in allowing the model to match the persistence of the employment and out of the labor force states found in individual labor market histories. We then use this model to address two questions: how do taxes affect aggregate employment and how do changes in frictions affect aggregate employment. We find that the presence of empirically plausible frictions has virtually no impact on the response of aggregate employment to taxes. The labor supply response present in our model greatly attenuates the employment response to frictions relative to the simplest matching model.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 54.

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Date of creation: 2009
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Handle: RePEc:red:sed009:54
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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