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Factor Complementarity and Labour Market Dynamics

Author

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  • Federico di Pace

    (University of St Andrews)

  • Stefania Villa

    (KU Leuven & University of Foggia)

Abstract

We propose and estimate a dynamic stochastic general equilibrium model featuring search and matching frictions, deep habits and a CES production function. The model successfully replicates the cyclical properties of labour market variables in the US economy for three main reasons. First, the endogenous mechanisms of the model – factor complementarity, deep habits and unemployment benefits – play a key role for explaining the amplification in unemployment and vacancies. Second, factor-biased productivity innovations are important exogenous sources of labour market dynamics. Third, demand-side innovations induce markup fluctuations consistent with the deep habits mechanism.

Suggested Citation

  • Federico di Pace & Stefania Villa, 2014. "Factor Complementarity and Labour Market Dynamics," CDMA Working Paper Series 201411, Centre for Dynamic Macroeconomic Analysis.
  • Handle: RePEc:san:cdmawp:1411
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    1. repec:eee:dyncon:v:82:y:2017:i:c:p:67-82 is not listed on IDEAS
    2. Cantore, Cristiano & Ferroni, Filippo & León-Ledesma, Miguel A., 2017. "The dynamics of hours worked and technology," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 67-82.
    3. Di Pace, Federico & Villa, Stefania, 2016. "Factor complementarity and labour market dynamics," European Economic Review, Elsevier, vol. 82(C), pages 70-112.

    More about this item

    Keywords

    CES; Deep Habits; Search and Matching; Bayesian estimation;

    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
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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