The Consumption-Tightness Puzzle

Morten Ravn

No 5670, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper introduces a labour force participation choice into a standard labour market matching model embedded in a dynamic stochastic general equilibrium set-up. The participation choice is modelled as a trade-off between forgoing the expected benefits of being search active and engaging in costly labour market search. In contrast to models with constant labour force participation, the model that we analyse induces a symmetry in firms' and workers' search decision since both sides of the labour market vary search effort at the extensive margins. We show that this set-up is (a) of considerable analytical convenience, and (b) that the introduction of a participation choice leads to a strong tendency for procyclical unemployment, very low volatility of labour market tightness, and for a positively sloped Beveridge curve. These implications are summarized by a linear relationship between the vu-ratio and the marginal utility of consumption that we refer to as the consumption-tightness puzzle given its counterfacutal implications. Moreover, we show that this relationship survives a number of extentions of the standard model and that it derives from the allowance for an endogeneous labour market participation choice.

Keywords: Labour market participation; Matching models; Intensive search margin; Labour market tightness; Unemployment; Homework (search for similar items in EconPapers)
JEL-codes: E24 E32 J20 J41 J64 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-dge and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (27)

Downloads: (external link)
https://cepr.org/publications/DP5670 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Chapter: The Consumption-Tightness Puzzle (2008)
Working Paper: The Consumption-Tightness Puzzle (2006)
Working Paper: The Consumption-Tightness Puzzle (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:5670

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP5670

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().