In this paper I evaluate to what extent a real business cycle (RBC) model that incorporates search and home production decisions can simultaneously account for the observed behavior of employment, ...unemployment and out-of-the-labor-force. This contrasts with the previous RBC literature, which analyzed employment or hours fluctuations either by lumping together unemployment and out-of-the-labor-force into a single non-employment state or by assuming a fixed labor force. Once the three employment states are explicitly introduced I find that the RBC model generates highly counterfactual labor market dynamics.
I consider a real business cycle model in which agents have private information about the i.i.d. realizations of their value of leisure. For the case of logarithmic preferences I provide an ...analytical characterization of the solution to the associated mechanism design problem. Moreover, I show a striking irrelevance result: that the stationary behavior of all aggregate variables are exactly the same in the private information economy as in the full information case. Numerical simulations indicate that the irrelevance result approximately holds for more general preferences.
This paper evaluates the importance of microeconomic irreversibilities for aggregate dynamics using a real-business-cycle (RBC) model characterized by investment irreversibilities at the ...establishment level. The main finding is that investment irreversibilities do not play a significant role in an otherwise standard real-business-cycle model: Even though investment irreversibilities are crucial for establishment-level dynamics, aggregate fluctuations are basically the same under fully flexible or completely irreversible investment.
This article introduces and analyzes a Walrasian model of worker flows, job flows, vacancies, and unemployment. Calibrating the model to U.S. data, the article finds that all variables comove with ...output quite well but that they fluctuate too little. However, the failure is not as bad as in "Shimer's puzzle." Interestingly, the article also finds that introducing establishment dynamics into the model, while realistic, is irrelevant for understanding unemployment and vacancy fluctuations: The business cycles of the model with establishment dynamics are virtually the same as those of a version with a representative firm.
While several countries have recognized the need of introducing flexibility to their labor markets, there are different ways of doing so. Using a small open economy with tenure-dependent separation ...taxes, this paper compares introducing a full reform with two partial alternatives: (1) the introduction of temporary contracts, and (2) the elimination of separation costs from all new hires while freezing them on the workers that were hired prior to the reform. The first alternative can achieve a first-best long run outcome but leads to a sharp initial recession. The second alternative generates a similar long run outcome but avoids the recessionary adjustment.
This article considers a real business cycle model with establishment level dynamics and uses it to analyze the effects of firing taxes. It finds that firing taxes can have significant consequences ...on business cycle fluctuations, that the largest effects are on aggregate employment, and that even relatively small firing taxes have substantial effects. A significant contribution of the article is computational: It describes how to use standard linear-quadratic methods to solve for a stochastic equilibrium of an (S,s) economy with tax distortions.
This article extends Hopenhayn and Rogerson's analysis of firing taxes by introducing a flexible form of capital and considering transitionary dynamics. The article finds that capital is not ...important for understanding the long run and welfare effects of firing taxes. However, capital is crucial for determining the short run consequences of eliminating this type of policy.
We construct a general equilibrium model to evaluate the quantitative effects of severance payments in the presence of contractual and reallocational frictions. Key elements of the model are ...establishment level dynamics, imperfect insurance markets, and variable search decisions. In contrast to previous studies that analyzed severance payments in frictionless environments, we find that severance payments can have large positive effects on employment and welfare. This result is a consequence of search being costly and of wage contracts being rigid. Moreover, we find that the firing penalty role of severance payments is much more important than their insurance role.
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