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American Economic Journal: Macroeconomics: Vol. 5 No. 1 (January 2013)

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The Cyclical Volatility of Labor Markets under Frictional Financial Markets

Article Citation

Petrosky-Nadeau, Nicolas, and Etienne Wasmer. 2013. "The Cyclical Volatility of Labor Markets under Frictional Financial Markets." American Economic Journal: Macroeconomics, 5(1): 193-221.

DOI: 10.1257/mac.5.1.193

Abstract

We provide a dynamic extension of an economy with search on credit and labor markets (Wasmer and Weil 2004). Financial frictions create volatility. They add an additional, almost acyclical, entry cost to procyclical job creation costs, thus increasing the elasticity of labor market tightness to productivity shocks by a factor of five to eight, compared to a matching economy with perfect financial markets. We characterize a dynamic financial multiplier that is increasing in total financial costs and minimized under a credit market Hosios- Pissarides rule. Financial frictions are an element of the solution to the volatility puzzle. (JEL C78, E24, E32, E44, G21, J63)

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Authors

Petrosky-Nadeau, Nicolas (Carnegie Mellon U)
Wasmer, Etienne (Sciences Po, Paris)

JEL Classifications

C78: Bargaining Theory; Matching Theory
E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
E32: Business Fluctuations; Cycles
E44: Financial Markets and the Macroeconomy
G21: Banks; Depository Institutions; Micro Finance Institutions; Mortgages
J63: Labor Turnover; Vacancies; Layoffs

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