Factor complementarity and labour market dynamics

Federico Di Pace and Stefania Villa

European Economic Review, 2016, vol. 82, issue C, 70-112

Abstract: We propose and estimate a dynamic stochastic general equilibrium model featuring search and matching frictions, deep habits and a CES production function. The model successfully replicates the cyclical properties of labour market variables in the US economy for three main reasons. First, two of the endogenous mechanisms of the model – factor complementarity and unemployment benefits – play a key role for explaining the amplification in unemployment and vacancies. Second, deep habits have a smaller but significant role as an endogenous mechanism. Third, capital-augmenting productivity, investment-specific and matching efficiency innovations explain large part of the variation in labour market variables.

Keywords: CES production function; Deep habits; Search and matching; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E24 E25 E32 J64 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:82:y:2016:i:c:p:70-112

DOI: 10.1016/j.euroecorev.2015.10.007

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