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Human Capital and Unemployment Dynamics: Why More Educated Workers Enjoy Greater Employment Stability
Why do more educated workers experience lower unemployment rates and lower employment volatility? A closer look at the data reveals that these workers have similar job finding rates, but much lower and less volatile separation rates than their less educated peers. We argue that on-the-job training, being complementary to formal education, is the reason for this pattern. Using a search and matching model with endogenous separations, we show that investments in match-specific human capital reduce the outside option of workers, implying less incentives to separate. The model generates ...
Income Inequality, Financial Crises, and Monetary Policy
We construct a general equilibrium model in which income inequality results in insufficient aggregate demand, deflation pressure, and excessive credit growth by allocating income to agents featuring low marginal propensity to consume, and if excessive, can lead to an endogenous financial crisis. This economy generates distributions for equilibrium prices and quantities that are highly skewed to the downside due to financial crises and the liquidity trap. Consequently, symmetric monetary policy rules designed to minimize fluctuations around fixed means become inefficient. A simultaneous ...
The Cyclicality of Labor Force Participation Flows: The Role of Labor Supply Elasticities and Wage Rigidity
Using a representative-household search and matching model with endogenous labor force participation, we study the cyclicality of labor market transition rates between employment, unemployment, and nonparticipation. When interpreted through the lens of the model, the behavior of transition rates implies that the participation margin is strongly countercyclical: the household’s incentive to send more workers to the labor force falls in expansions. We identify two key channels through which the model delivers this result: (i) the procyclical values of non-market activities and (ii) wage ...
Elasticities of Labor Supply and Labor Force Participation Flows
REVISED MARCH 2019 Using a representative-household search and matching model with endogenous labor force participation, we study the interactions between extensive-margin labor supply elasticities and the cyclicality of labor force participation flows. Our model successfully replicates salient business-cycle features of all transition rates between three labor market states, the unemployment rate, and the labor force participation rate, while using values of elasticities consistent with micro evidence. Our results underscore the importance of the procyclical opportunity cost of employment, ...