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Labor-Market Volatility in the Search-and-Matching Model: The Role of Investment-Specific Technology Shocks

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Author Info
Renato Faccini
Salvador Ortigueira

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Abstract

Shocks to investment-specific technology have been identified as a main source of U.S. aggregate output volatility. In this paper we assess the contribution of these shocks to the volatility of labor market variables, namely, unemployment, vacancies, tightness and the job-finding rate. Thus, our paper contributes to a recent body of literature assessing the ability of the search-and-matching model to account for the large volatility observed in labor market variables. To this aim, we solve a neoclassical economy with search and matching in the labor market, where neutral and investment-specific technologies are subject to shocks. The three key features of our model economy are: i) Firms are large, in the sense that they employ many workers. ii) Adjusting capital and labor is costly. iii) Wages are the outcome of an intra-firm Nash-bargaining problem between the firm and its workers. In our calibrated economy, we find that shocks to investment-specific technology explain 40 percent of the observed volatility in U.S. labor productivity. Moreover, these shocks generate relative volatilities in vacancies and the workers' job finding rate which match those observed in U.S. data. Relative volatilities in unemployment and labor market tightness are 55 and 75 percent of their empirical values, respectively.

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Paper provided by European University Institute in its series Economics Working Papers with number ECO2008/39.

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Date of creation: 2008
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Handle: RePEc:eui:euiwps:eco2008/39

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Related research
Keywords: Business Cycles; Labor Market Fluctuations; Investment-Specific Technical Change; Search and Matching; Adjustment Costs; Wage Bargaining.;

Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - Technological Change: Choices and Consequences; Diffusion Processes

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