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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.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1292.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1292
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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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  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. 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, 02.
  3. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
  4. Hellwig, Christian & Venkateswaran, Venky, 2009. "Setting the right prices for the wrong reasons," Journal of Monetary Economics, Elsevier, vol. 56(S), pages S57-S77.
  5. Anton A. Cheremukhin & Paulina Restrepo Echavarria, 2008. "The Labor Wedge as a Matching Friction," 2008 Meeting Papers 209, Society for Economic Dynamics.
  6. Anton Cheremukhin, 2010. "Labor Matching Model: Putting the Pieces Together," 2010 Meeting Papers 260, Society for Economic Dynamics.
  7. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc.
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