The cyclical volatility of labor markets under frictional financial markets

This paper shows in an economy with search on credit and labor markets that a financial multiplier raises the elasticity of labor market tightness to productivity shocks, and that this multiplier is an increasing function of total financial costs in the economy. Under a credit market Hosios-Pissarides rule, total search costs in the credit market are minimized, and so is the financial multiplier. Relaxing that condition leads to larger multipliers which can match or even overshoot the elasticity of market tightness in the data. The reason is similar to that of Hagedorn and Manovskii (2008) small labor surplus assumption: we identify the configurations of parameters leading to small "bank" surplus or a small "firm surplus" in the credit market, conducive of an amplification of productivity shocks. Furthermore, when wages are endogenous, it is possible to partially relax the small labor surplus assumption in order to match the data.

Search Frictions in Physical Capital Markets as a Propagation Mechanism

We build a Dynamic General Equilibrium model with search frictions for the allocation of physical capital and investigate its implications for the business cycle. While the model is in principle capable of generating substantial internal propagation to small exogenous shocks, the quantitative effects are modest once we calibrate the model to fit firm-level capital flows. We then extend the model with credit market frictions that lead to countercyclical default and countercyclical risk premia as in the data. Countercyclical default directly affects capital reallocation and has important general equilibrium income effects on labor supply. Yet, for calibrations in line with observed consumption dynamics, we find that even in this extended model, search frictions in physical capital markets play only a small role for business cycle fluctuations.Capital allocation frictions, search and matching, credit frictions, business cycles, dynamic general equilibrium

Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions

Building a model with three imperfect markets – goods, labor and credit – representing a product's life-cycle, we find that goods market frictions drastically change the qualitative and quantitative dynamics of labor market variables. The calibrated model leads to a significant reduction in the gap with the data, both in terms of persistence and volatility while search models of the labor market fail in one of the two dimensions. Two factors related to goods market frictions generate these results: i) the expected dynamics of consumers' search for goods, itself depending on the income redistributed by firms and the entry of new products; and ii) the expected dynamics of prices, which alter future profit flows.search, matching, business cycle, goods market imperfection

Credit, Vacancies and Unemployment Fluctuations

The propagation properties of the standard search and matching model of equilibrium unemployment are significantly altered when vacancy costs require some external financing on frictional credit markets. The latter induce variation in the shadow cost of external funds of the cycle that greatly increase the elasticity of vacancy postings to productivity through two distinct channels: (i) a cost channel - a lowered shadow cost during an upturn as credit constraints are relaxed increases the incentive to post vacancies; (ii) a wage channel - the improved bargaining position of firms afforded by the lowered cost of vacancies limits of the upward pressure of market tightness on wages. As a result, the model can match the observed volatility of unemployment, vacancies and labor market tightness. Moreover, the progressive easing of financing constraints to innovations generates persistence in the response of market tightness and vacancies, a robust feature of the data and shortcoming of the standard model.

Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions

This paper shows that goods-market frictions drastically change the dynamics of the labor market, bridging the gap with the data both in terms of persistence and volatility. In a DSGE model with three imperfect markets - goods, labor and credit - we find that credit- and goods-market imperfections are substitutable in raising volatility. Goods-market frictions are however unique in generating persistence. The two key mechanisms generating autocorrelation in growth rates and the hump-shaped pattern in the response to productivity shocks are related to the goods market: i) countercyclical dynamics of goods market tightness and prices, which alter future profit flows and raise persistence and ii) procyclical search effort in the goods market, by either consumers, firms or both, raises both amplification and persistence. Expanding our knowledge of goods market frictions is thus needed for a full account of labor market dynamics

An Equilibrium Asset Pricing Model with Labor Market Search

Search frictions in the labor market help explain the equity premium in the financial market. We embed the Diamond-Mortensen-Pissarides search framework into a dynamic stochastic general equilibrium model with recursive preferences. The model produces a sizeable equity premium of 4.54% per annum with a low interest rate volatility of 1.34%. The equity premium is strongly countercyclical, and forecastable with labor market tightness, a pattern we confirm in the data. Intriguingly, search frictions, combined with a small labor surplus and large job destruction flows, give rise endogenously to rare disaster risks a la Rietz (1988) and Barro (2006).

Disentangling goods, labor and credit market frictions in three European economies

We build a flexible model with search frictions in three markets: credit, labor, and goods markets. We then apply this model (called CLG) to three different economies: a flexible, finance-driven economy (the UK), an economy with wage moderation (Germany), and an economy with structural rigidities (Spain). In the three countries, goods and credit market frictions play a dominant role in entry costs and account for 75% to 85% of total entry costs. In the goods market, adverse supply shocks are amplified through their propagation to the demand side, as they also imply income losses for consumers. This adds up to, at most, an additional 15% to 25% to the impact of the shocks. Finally, the speed of matching in the goods market and the credit market accounts for a small fraction of unemployment: Most of the variation in unemployment comes from the speed of matching in the labor market

Shopping Time

There is a renewed interest in macroeconomic theories of search frictions in the goods market that help solve quantitative puzzles on amplification and persistence of GDP, sales, inventory and advertisement. This requires a deeper understanding of the cyclical properties of the intensive margins of search in this market. Using the American Time Use Survey we construct an indicator of shopping time. It includes both searching and purchasing goods and is based on 25 time use categories (out of more than 400 categories). We find that average time spent shopping declined in the aggregate over the period 2008-2010 compared to 2005-2007. The decline was largest for the unemployed who went from spending more time shopping for goods than the employed to roughly the same, or even less, time. Cross-state and individual regressions indicate procyclical consumer shopping time in the goods market. This evidence poses a challenge for models in which price comparisons are a driver of business cycles

Costly Capital Allocation with Credit Market Frictions as a Propagation Mechanism *

Abstract Evidence from firm-level data shows that capital separation and reallocation are important phenomena. Aggregate gross investment flows are thus substantially larger than the net flows reported in the national accounts. Furthermore, separation rates vary inversely with the cycle while reallocation rates are strongly procyclical. This suggests that capital stocks are more volatile and procyclical than in standard business cycle models. We build a search-and-matching model for capital with endogenous separation due to costly state verification to capture these firm-level characteristics about capital flows. We find that compared to the frictionless counterpart but also compared to models of financial frictions without costly capital reallocation, our model generates substantial internal amplification and matches surprisingly well the persistence in U.S. output growth. This suggests that credit market frictions in combination with costly capital allocation have important business cycle effects. * We thank Alain Delacroix, Jean Imbs, Etienne Wasmer and seminar participants of the Journées du CIRPÉE 2005, HEC Montréal, the Bank of Canada, Paris I, the Swiss National Bank and HEC Lausanne for helpful comments. Financial support from FQRSC, SSHRC (Kurmann) and PAFARC-UQAM (Petrosky-Nadeau) is gratefully acknowledged