Financial Disruptions and the Cyclical Upgrading of Labor

By Brendan Epstein, Alan Finkelstein Shapiro, Andrés González Gómez

June 8, 2017

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Brendan Epstein, Alan Finkelstein Shapiro, and Andrés González Gómez. Financial Disruptions and the Cyclical Upgrading of Labor, (USA: International Monetary Fund, 2017) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Amid total factor productivity (TFP) shocks job-to-job flows amplify the volatility of unemployment, but the aggregate implications of job-to-job flows amid financial shocks are less understood. To develop such understanding we model a general equilibrium labor-search framework that incorporates on-the-job (OTJ) search and distinctly accounts for the differential impact of TFP and financial shocks. Surprisingly, we find that the interaction of OTJ search with financial shocks is sufficiently different from its interaction with TFP shocks so that, under standard calibrations, our model generates aggregate dynamics exceedingly in line with the behavior of key U.S. macro data across several decades and in the wake of the Global Financial Crisis as well. Importantly, as in the data, the model yields relatively high volatilities of consumption, labor income, and unemployment. As such, our work contributes to resolving two limitations of current general equilibrium labor-search theory: under standard calibrations models without OTJ search generate implausibly low unemployment volatility, while models with OTJ search generate unemployment volatility closer to the data but at the expense of implausibly low consumption and labor-income volatility.

Subject: Income, Labor, National accounts, Production, Total factor productivity, Unemployment, Wages

Keywords: Business cycle, Business cycles, Collateral constraint, Discount factor, Financial frictions, Global, Income, Labor income, Labor market, Labor search frictions, Market tightness, Maximization problem, On-the-job search, OTJ search, Recruiting decision, TFP shock, Total factor productivity, Unemployment, Wage bill, Wages, WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/131
Stock No:

WPIEA2017131
ISBN:

9781475595864
ISSN:

1018-5941

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