Labor-Market Volatility in the Search-and-Matching Model: The Role of Investment-Specific Technology Shocks

Renato Faccini () and Salvador Ortigueira ()

No ECO2008/39, Economics Working Papers from European University Institute

Abstract: Shocks to investment-specific technology have been identified as a main source of U.S. aggregate output volatility. In this paper we assess the contribution of these shocks to the volatility of labor market variables, namely, unemployment, vacancies, tightness and the job-finding rate. Thus, our paper contributes to a recent body of literature assessing the ability of the search-and-matching model to account for the large volatility observed in labor market variables. To this aim, we solve a neoclassical economy with search and matching in the labor market, where neutral and investment-specific technologies are subject to shocks. The three key features of our model economy are: i) Firms are large, in the sense that they employ many workers. ii) Adjusting capital and labor is costly. iii) Wages are the outcome of an intra-firm Nash-bargaining problem between the firm and its workers. In our calibrated economy, we find that shocks to investment-specific technology explain 40 percent of the observed volatility in U.S. labor productivity. Moreover, these shocks generate relative volatilities in vacancies and the workers' job finding rate which match those observed in U.S. data. Relative volatilities in unemployment and labor market tightness are 55 and 75 percent of their empirical values, respectively.

Keywords: Business Cycles; Labor Market Fluctuations; Investment-Specific Technical Change; Search and Matching; Adjustment Costs; Wage Bargaining. (search for similar items in EconPapers)
JEL-codes: E22 E24 E32 J41 J64 O33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lab and nep-mac
Date: 2008
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