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Efficiency and Labor Market Dynamics in a Model of Labor Selection

Author

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  • Christian Merkl

    (Friedrich-Alexander-University Erlangen-Nurember)

  • Sanjay K. Chugh

    (University of Maryland)

Abstract

We characterize efficient allocations and business cycle fluctuations in a labor-selection model. Due to forward-looking hiring costs and labor supply decisions, efficiency entails both static and intertemporal dimensions. We develop welfare-relevant measures of marginal rates of transformation and efficiency along each margin and show how they nest their counterparts in the frictionless RBC model. In a calibrated version of the model, efficient fluctuations feature highly volatile unemployment and job-finding rates, in line with empirical evidence. We show analytically in a simplified version of the model that volatility arises from selection effects, not associated general equilibrium effects. We also develop sufficient conditions on wages that support efficient allocations in a decentralized economy. These conditions are independent of the wage-determination process, unlike the well-known Hosios condition for matching models, which assumes Nash-bargained wages. Also unlike the Hosios condition, there is no simple restriction on Nash bargaining that guarantees that Nash wages can support efficient allocations. Cyclical fluctuations in the Nash-bargaining economy display even larger amplification of productivity shocks into labor market outcomes than in the efficient economy, without extreme assumptions about bargaining shares, inflexibility of wages, or the size of surpluses that govern labor demand. The results establish normative and positive foundations for DSGE labor selection models.

Suggested Citation

  • Christian Merkl & Sanjay K. Chugh, 2011. "Efficiency and Labor Market Dynamics in a Model of Labor Selection," 2011 Meeting Papers 824, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:824
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Christian Merkl & Thijs van Rens, 2011. "Selective hiring and welfare analysis in labor market models," Economics Working Papers 1277, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2012.
    2. Merkl, Christian & Stüber, Heiko, 2017. "Value added, wages, and labor market flows at the establishment level," FAU Discussion Papers in Economics 03/2017, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    3. Merkl, Christian & Stüber, Heiko, 2016. "Wage cyclicalities and labor market dynamics at the establishment level: Theory and evidence," FAU Discussion Papers in Economics 12/2016, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    4. Sanjay K. Chugh & Wolfgang Lechthalerz & Christian Merkl, 2015. "Optimal Fiscal Policy with Labor Selection," Boston College Working Papers in Economics 884, Boston College Department of Economics.
    5. Hochmuth, Brigitte & Gartner, Hermann & Kohlbrecher, Britta & Merkl, Christian, 2016. "Labor selection over the business cycle: An empirical assessment," FAU Discussion Papers in Economics 02/2016, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    6. Sengul, Gonul, 2017. "Effect of labor market policies on unemployment when firms adapt their recruitment strategy," Economic Modelling, Elsevier, vol. 60(C), pages 169-179.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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