EconStor >
Forschungsinstitut zur Zukunft der Arbeit (IZA), Bonn >
IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA) >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/44166
  
Title:The cyclical volatility of labor markets under frictional financial markets PDF Logo
Authors:Petrosky-Nadeau, Nicolas
Wasmer, Etienne
Issue Date:2010
Series/Report no.:Discussion paper series // Forschungsinstitut zur Zukunft der Arbeit 5131
Abstract:Financial frictions are known to raise the volatility of economies to shocks (e.g. Bernanke and Gertler 1989). We follow this line of research to the labor literature concerned by the volatility of labor market outcomes to productivity shocks initiated by Shimer (2005): in an economy with search on credit and labor markets, a financial multiplier raises the elasticity of labor market tightness to productivity shocks. This multiplier increases with total financial costs and is minimized under a credit market Hosios-Pissarides rule. Using a flexible calibration method based on small perturbations, we find the parameter values to match the US share of the financial sector. Those values are far away from Hosios and lead to a financial accelerator of about 3.6 (exogenous wages) to 4.5 (endogenous wages). Both match Shimer (2005)'s elasticity of labor market tightness to productivity shocks. Financial frictions are thus an alternative to the small labor surplus assumption in Hagedorn and Manovskii (2008): we keep the value of wages over productivity below 0.78. We conclude that financial frictions are a good candidate to solve the volatility puzzle and rejoin Pissarides (2009) in arguing that hiring costs must be partly non-proportional to congestion in the labor market, which is the case of financial costs.
Subjects:search
financial imperfections
Shimer puzzle
macroeconomic volatility
JEL:E44
J60
Persistent Identifier of the first edition:urn:nbn:de:101:1-201010133098
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

Files in This Item:
File Description SizeFormat
645056618.pdf223.03 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/44166

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.