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Factor complementarity and labour market dynamics

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  • Di Pace, Federico
  • Villa, Stefania

Abstract

We propose and estimate a dynamic stochastic general equilibrium model featuring search and matching frictions, deep habits and a CES production function. The model successfully replicates the cyclical properties of labour market variables in the US economy for three main reasons. First, two of the endogenous mechanisms of the model – factor complementarity and unemployment benefits – play a key role for explaining the amplification in unemployment and vacancies. Second, deep habits have a smaller but significant role as an endogenous mechanism. Third, capital-augmenting productivity, investment-specific and matching efficiency innovations explain large part of the variation in labour market variables.

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  • Di Pace, Federico & Villa, Stefania, 2016. "Factor complementarity and labour market dynamics," European Economic Review, Elsevier, vol. 82(C), pages 70-112.
    • Handle: RePEc:eee:eecrev:v:82:y:2016:i:c:p:70-112
    DOI: 10.1016/j.euroecorev.2015.10.007
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    Cited by:

    1. Mumtaz, Haroon & Theodoridis, Konstantinos, 2020. "Dynamic effects of monetary policy shocks on macroeconomic volatility," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 262-282.
    2. Cantelmo, Alessandro & Melina, Giovanni, 2023. "Sectoral labor mobility and optimal monetary policy," Macroeconomic Dynamics, Cambridge University Press, vol. 27(1), pages 1-26, January.
    3. Riccardo M. Masolo, 2022. "Mainly Employment: Survey-Based News and the Business Cycle," Discussion Papers 2211, Centre for Macroeconomics (CFM).
    4. Josué Diwambuena & Raquel Fonseca & Stefan Schubert, 2023. "Labor Market Institutions, Productivity, and the Business Cycle: An Application to Italy," Cahiers de recherche / Working Papers 2302, Chaire de recherche sur les enjeux économiques intergénérationnels / Research Chair in Intergenerational Economics.
    5. Charalampidis, Nikolaos, 2022. "Top income shares, inequality, and business cycles: United States, 1957–2016," European Economic Review, Elsevier, vol. 150(C).
    6. Cantore, Cristiano & Ferroni, Filippo & León-Ledesma, Miguel A., 2017. "The dynamics of hours worked and technology," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 67-82.
    7. Nikolaos Charalampidis, 2020. "The U.S. Labor Income Share And Automation Shocks," Economic Inquiry, Western Economic Association International, vol. 58(1), pages 294-318, January.
    8. Lewis, Vivien & Villa, Stefania & Wolters, Maik H., 2019. "Labor productivity, effort and the euro area business cycle," Discussion Papers 44/2019, Deutsche Bundesbank.

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    More about this item

    Keywords

    CES production function; Deep habits; Search and matching; Bayesian estimation;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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