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The Cyclicality of the Opportunity Cost of Employment

Author

Listed:
  • Loukas Karabarbounis

    (University of Chicago)

  • Gabriel Chodorow-Reich

    (Harvard University)

Abstract

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.

Suggested Citation

  • Loukas Karabarbounis & Gabriel Chodorow-Reich, 2014. "The Cyclicality of the Opportunity Cost of Employment," 2014 Meeting Papers 88, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:88
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    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
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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