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Heterogeneous Information and Labor Market Fluctuations


  • Venky Venkateswaran


I introduce dispersed information in a search and matching model of the labor market, where firms are hit by aggregate and idiosyncratic productivity shocks. The latter induce larger responses in recruiting activity than the former - because aggregate shocks have general equilibrium effects which partially offset the change in fundamentals. Informational frictions prevent firms from disentangling aggregate and idiosyncratic shocks. With Bayesian updating, firms attribute aggregate shocks largely to idiosyncratic factors, because the latter have significantly larger variances. This misattribution translates into an increased responsiveness of employment to aggregate shocks, relative to an economy with full information. I show that in a calibrated model, this channel has quantitatively significant effects and offers a potential solution to a well-known puzzle - the inability of standard search and matching models to generate sufficient volatility in labor market variables. In particular, the model with dispersed information brings the relative volatilities of employment and market tightness very close to those observed in the data.

Suggested Citation

  • Venky Venkateswaran, 2011. "Heterogeneous Information and Labor Market Fluctuations," 2011 Meeting Papers 1292, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:1292

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    References listed on IDEAS

    1. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2007. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Chapters,in: NBER Macroeconomics Annual 2006, Volume 21, pages 107-180 National Bureau of Economic Research, Inc.
    2. Cheremukhin, Anton A. & Restrepo-Echavarria, Paulina, 2014. "The labor wedge as a matching friction," European Economic Review, Elsevier, vol. 68(C), pages 71-92.
    3. Anton Cheremukhin, 2010. "Labor Matching Model: Putting the Pieces Together," 2010 Meeting Papers 260, Society for Economic Dynamics.
    4. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
    5. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc.
    6. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 468-510.
    7. Hellwig, Christian & Venkateswaran, Venky, 2009. "Setting the right prices for the wrong reasons," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 57-77.
    8. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, February.
    9. Burcu Eyigungor, 2010. "Specific Capital and Vintage Effects on the Dynamics of Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 100(3), pages 1214-1237, June.
    10. Bjoern Bruegemann & Giuseppe Moscarini, 2007. "Rent Rigidity, Asymmetric Information, and Volatility Bounds in Labor Markets," NBER Working Papers 13030, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Leo Kaas & Philipp Kircher, 2015. "Efficient Firm Dynamics in a Frictional Labor Market," American Economic Review, American Economic Association, vol. 105(10), pages 3030-3060, October.
    2. George-Marios Angeletos & Chen Lian, 2016. "Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination," NBER Working Papers 22297, National Bureau of Economic Research, Inc.
    3. Rousakis, Michael, 2012. "Expectations and Fluctuations : The Role of Monetary Policy," The Warwick Economics Research Paper Series (TWERPS) 984, University of Warwick, Department of Economics.
    4. Bergemann, Dirk & Heumann, Tibor & Morris, Stephen, 2015. "Information and volatility," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 427-465.

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