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The Cyclicality of the Opportunity Cost of Employment

  • Loukas Karabarbounis

    (University of Chicago)

  • Gabriel Chodorow-Reich

    (Harvard University)

The flow opportunity cost of moving from unemployment to employment consists of foregone public benefits and foregone utility from non-working time relative to consumption. Recent research uses a relatively high opportunity cost to generate volatile unemployment fluctuations in search and matching models of the labor market. We argue that not only the level but also the cyclicality of the opportunity cost matters. Using detailed microdata, administrative data, and the structure of the search and matching model with concave and non-separable preferences, we document that the opportunity cost of employment is as procyclical as and more volatile than the marginal product of employment in the data. With our estimated cyclicality of the opportunity cost, the volatility of unemployment is essentially neutral with respect to the level of the opportunity cost, and far smaller than the volatility of unemployment in the data. 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 Society for Economic Dynamics in its series 2014 Meeting Papers with number 88.

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Date of creation: 2014
Date of revision:
Handle: RePEc:red:sed014:88
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
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