General Equilibrium Effects and Labor Market Fluctuations

Noritaka Kudoh and Hiroaki Miyamoto

No SDES-2021-4, Working Papers from Kochi University of Technology, School of Economics and Management

Abstract: Business cycle models with search-matching frictions are studied to evaluate the importance of general equilibrium effects generated by movements in the stochastic discount factor and the income effect on labor supply. Without variable hours of work, the general equilibrium effect works only through the stochastic discount factor and is quantitatively very weak. With variable hours of work, the income effect generates procyclical movements in the value of leisure and the marginal hourly wage rate. This effect is sizable and dampens labor market fluctuations. We also study discount factor shocks and find that capital formation strongly enhances labor market fluctuations.

Keywords: labor market search; stochastic discount factor; unemployment volatility (search for similar items in EconPapers)
JEL-codes: E32 J20 J64 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2021-05, Revised 2021-05
New Economics Papers: this item is included in nep-dge and nep-mac
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Published in SDE Series, May 2021, pages 1-27

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