Efficiency and labor market dynamics in a model of labor selection

Sanjay Chugh and Christian Merkl

No 1684, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: We characterize efficient allocations and business cycle fluctuations in a labor selection model. Due to forward-looking hiring and labor supply decisions, efficiency entails both static and intertemporal margins. We develop welfare-relevant measures of marginal rates of transformation and efficiency along each margin that nest their counterparts in frictionless labor markets. In a calibrated version of the model, efficient fluctuations feature highly volatile unemployment and job-finding rates, in line with empirical evidence. We show analytically in a simplified version of the model that volatility arises from selection effects, rather than general equilibrium effects. We also develop sufficient conditions on wages, which are independent of the wage-determination process, that decentralize efficient allocations. Unlike the Hosios condition for matching models, there is no simple restriction on Nash bargaining that guarantees that Nash wages can support efficient allocations. Cyclical fluctuations in the Nash-bargaining economy display even larger amplification of productivity shocks into labor market outcomes than in the efficient economy, without extreme assumptions about bargaining shares, inflexibility of wages, or the size of surpluses that govern labor demand. The results establish normative and positive foundations for DSGE labor selection models.

Keywords: Labor market frictions; efficiency (search for similar items in EconPapers)
JEL-codes: E24 E32 J20 (search for similar items in EconPapers)
Date: 2011
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Related works:
Journal Article: EFFICIENCY AND LABOR MARKET DYNAMICS IN A MODEL OF LABOR SELECTION (2016)
Working Paper: Efficiency and Labor Market Dynamics in a Model of Labor Selection (2015)
Working Paper: Efficiency and Labor Market Dynamics in a Model of Labor Selection (2015)
Working Paper: Efficiency and Labor Market Dynamics in a Model of Labor Selection (2013)
Working Paper: Efficiency and Labor Market Dynamics in a Model of Labor Selection (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1684

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