Costs of Business Cycles for Unskilled Workers

This paper reconsiders the cost of business cycles under market incompleteness. Primarily, we focus on the heterogeneity in the cost among different skill groups. Unskilled workers are subject to a much larger risk of unemployment during recessions than are skilled workers. Moreover, unskilled workers earn less income, which limits their ability to self-insure. We examine how this heterogeneity in unemployment risk and income translates into heterogeneity in the cost of business cycles. We find that the welfare cost of business cycles for unskilled workers is substantially higher than the welfare cost for skilled workers.Cost of Business Cycles, Incomplete Markets, Skill and Unemployment

On Flexibity and Productivity

We introduce a joint model of labor market search and firm size dynamics to explain the differential in labor market and productivity outcomes between the U.S. and the European Union. At the core, our model is a hybrid of the labor market search model by Mortensen and Pissarides (1994) and the model of the size distribution firms by Lucas (1978). Around this core, however, we add several layers that we use to add rigidities that affect the `flexibility' with which resources are allocated in our model economy. The first layer that we add is creative destruction. That is, we relate the need for job reallocations to the growth rate of the economy. In each period better firms enter while inferior firms exit, in the spirit of Jovanovic (1982). Hence, contrary to Mortensen and Pissarides (1994), exit of firms, and the destruction of the jobs that they offer, is thus endogenous in our model. The second layer that we add is the occupational choice of workers that are without a job. That is, in equilibrium workers endogenously decide whether to look for a job or to become an entrepreneur based on the quality of a business idea that they have. The third layer is the dynamic hiring and firing decisions of firms. Similar to Hopenhayn and Rogerson (1993), the firm dynamics in our model economy are in large part driven by the dynamic hiring and firing decisions made by the existing firms. We use this model to identify which types of rigidities have the biggest distortionary effect on the allocation of resources both in terms of labor as well as in terms of productivitySearch, Firm Size Dynamics, Productivity

Why Did the Average Duration of Unemployment Become So Much Longer?

This paper examines the causes of the observed increase in the average unemployment duration over the past thirty years. First we analyze if changes in the demographic com- position of the U.S. labor force can explain this increase. In particular, we examine how much of the observed change can be explained by the change in age and gender compo- sition. We then consider institutional changes, such as the change in the generosity and coverage of unemployment insurance. Changes in the composition of the labor force and institutional changes can only partially account for the observed increase in the duration of unemployment. We construct a job search model and calibrate it to the U.S. data. The results indicate that more than 70% of the increase in the duration of unemployment over the last thirty years can be explained by an increase in within-group wage inequality.Unemployment Duration, Demographic Change, Within-Group Wage In-equality, Job Search Model

The decline of the U.S. labor share

Over the past quarter century, labor's share of income in the United States has trended downward, reaching its lowest level in the postwar period after the Great Recession. A detailed examination of the magnitude, determinants, and implications of this decline delivers five conclusions. First, about a third of the decline in the published labor share appears to be an artifact of statistical procedures used to impute the labor income of the self-employed that underlies the headline measure. Second, movements in labor's share are not solely a feature of recent U.S. history: The relative stability of the aggregate labor share prior to the 1980s in fact veiled substantial, though offsetting, movements in labor shares within industries. By contrast, the recent decline has been dominated by the trade and manufacturing sectors. Third, U.S. data provide limited support for neoclassical explanations based on the substitution of capital for (unskilled) labor to exploit technical change embodied in new capital goods. Fourth, prima facie evidence for institutional explanations based on the decline in unionization is inconclusive. Finally, our analysis identifies offshoring of the labor-intensive component of the U.S. supply chain as a leading potential explanation of the decline in the U.S. labor share over the past 25 years

Unemployment insurance and the role of self-insurance

This paper employs a dynamic general equilibrium model to design and evaluate long-term unemployment insurance plans (plans that depend on workers' unemployment history) in economies with and without hidden savings. We show that optimal benefit schemes and welfare implications differ considerably in these two economies. Switching to long-term plans can improve welfare significantly in the absence of hidden savings. However, welfare gains are much lower when we consider hidden savings. Therefore, we argue that switching to long-term plans should not be a primary concern from a policy point of view

Appendices for "Revisiting the Welfare Effects of Eliminating Business Cycles"

This paper offers several appendices for the article: the integration principle applied to the baseline model, the computational algorithm for the baseline model, calculating the welfare gain, algorithm for the model with short- and long-term unemployment, as well as additional result tables.

Gross worker flows over the business cycle

We build a hybrid model of the aggregate labor market that features both standard labor supply forces and frictions in order to study the cyclical properties of gross worker flows across the three labor market states: employment, unemployment, and nonparticipation. Our goal is to assess the relative importance of frictions and labor supply in accounting for fluctuations in labor market outcomes. Our parsimonious model is able to capture the key features of the cyclical movements in gross worker flows and indicates an important role for both frictions and labor supply

Aggregate Labor Market Outcomes: The Role of Choice and Chance

Commonly used frictional models of the labor market imply that changes in frictions have large effects on steady state employment and unemployment. We use a model that features both frictions and an operative labor supply margin to examine the robustness of this feature to the inclusion of a empirically reasonable labor supply channel. The response of unemployment to changes in frictions is similar in both models. But the labor supply response present in our model greatly attenuates the effects of frictions on steady state employment relative to the simplest matching model, and two common extensions. We also find that the presence of empirically plausible frictions has virtually no impact on the response of aggregate employment to taxes.

A Three State Model of Worker Flows in General Equilibrium

We develop a simple model featuring search frictions and a nondegenerate labor supply decision along the extensive margin. The model is a standard version of the neoclassical growth model with indivisible labor with idiosyncratic shocks and frictions characterized by employment loss and employment opportunity arrival shocks. We argue that it is able to account for the key features of observed labor market flows for reasonable parameter values. Persistent idiosyncratic productivity shocks play a key role in allowing the model to match the persistence of the employment and out of the labor force states found in individual labor market histories.