Financial Shocks and the Cyclical Behavior of Skilled and Unskilled Unemployment

Jose Lopez and Virginia Olivella Moppett

Working papers from Banque de France

Abstract: We study the effect of financial shocks in labor market dynamics. We build a model with two types of labor, two types of capital and both search and financial frictions. We find that financial shocks, modeled as exogenous disturbances to the borrowing constraint of firms, can generate realistic movements in aggregate employment and reproduce the volatile and countercyclical ratio of skilled to unskilled employment observed in the data. Tighter financial conditions impact employment through three channels: i) a fall in the marginal product of labor as a result of a reduction in aggregate capital, ii) an increase in the shadow cost of labor in terms of external financing and iii) an endogenous wage rigidity caused by a short-lived increase in households' consumption and in their marginal value of time. This endogenous wage rigidity together with the model s calibration implying a higher re-hiring probability and lower recruitment costs for unskilled workers, explains the volatility of relative employment.

Keywords: Financial Shocks; Business Cycles; Employment Volatility; Search. (search for similar items in EconPapers)
JEL-codes: E24 E32 E44 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2014
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:496

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