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Diminishing Returns And Labor Market Adjustments

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  • Dao, Ha
  • Delacroix, Alain

Abstract

We amend the canonical matching model by assuming diminishing returns to labor. We put the model to the twin test of generating a high volatility of labor market variables in response to productivity shocks (the “Shimer puzzle”) and a moderate response to changes in unemployment benefits and find that it passes that test. It does not feature wage rigidity, nor is it based on a small surplus calibration. Diminishing returns introduce a distinction between marginal and average surplus. With a standard (large average surplus) calibration, we can have a small marginal surplus, and thus a strong response of hiring to productivity shocks, while obtaining a measured response of unemployment to changes in benefits.

Suggested Citation

  • Dao, Ha & Delacroix, Alain, 2018. "Diminishing Returns And Labor Market Adjustments," Macroeconomic Dynamics, Cambridge University Press, vol. 22(8), pages 2088-2106, December.
    • Handle: RePEc:cup:macdyn:v:22:y:2018:i:08:p:2088-2106_00
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    Cited by:

    1. Bjoern Bruegemann, 2023. "Invariance of Unemployment and Vacancy Dynamics with Respect to Diminishing Returns to Labor at the Firm Level," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 915-942, December.

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