The Cyclical Volatility of Labor Markets under Frictional Financial Markets
- (pp. 193-221)
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)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.5.1.193Additional Materials
JEL Classification
- 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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