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High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations

Author

Listed:
  • Indrajit Mitra

    (Financial Markets, Federal Reserve Bank of Atlanta, Atlanta, Georgia 30309)

  • Taeuk Seo

    (Stephen M. Ross School of Business, University of Michigan–Ann Arbor, Ann Arbor, Michigan 48109)

  • Yu Xu

    (Lerner College of Business and Economics, University of Delaware, Newark, Delaware 19716)

Abstract

We establish an observational equivalence between unemployment fluctuations of the Diamond-Mortensen-Pissarides search economy augmented with time varying risk premia and an otherwise identical economy without risk premia but with a time varying value of leisure. This equivalence holds for general risk premia processes and allows us to view the effects of different models of risk premia as operating through a single channel—one that alters the value of leisure. We derive simple expressions for semielasticities of labor market tightness with respect to productivity and risk premium shocks. We show wages can be used to detect misspecification in the discount rate process used in hiring decisions.

Suggested Citation

  • Indrajit Mitra & Taeuk Seo & Yu Xu, 2024. "High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations," Management Science, INFORMS, vol. 70(6), pages 4051-4068, June.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:6:p:4051-4068
    DOI: 10.1287/mnsc.2022.03712
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    References listed on IDEAS

    as
    1. Lawrence J. Christiano & Martin S. Eichenbaum & Mathias Trabandt, 2016. "Unemployment and Business Cycles," Econometrica, Econometric Society, vol. 84(4), pages 1523-1569, July.
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    6. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    7. Robert E. Hall, 2017. "High Discounts and High Unemployment," American Economic Review, American Economic Association, vol. 107(2), pages 305-330, February.
    8. Indrajit Mitra & Yu Xu & Stijn Van Nieuwerburgh, 2020. "Time-Varying Risk Premium and Unemployment Risk across Age Groups," The Review of Financial Studies, Society for Financial Studies, vol. 33(8), pages 3624-3673.
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    10. Martin Lettau & Jessica A. Wachter, 2007. "Why Is Long‐Horizon Equity Less Risky? A Duration‐Based Explanation of the Value Premium," Journal of Finance, American Finance Association, vol. 62(1), pages 55-92, February.
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    More about this item

    Keywords

    equivalence result; fundamental surplus; unemployment fluctuations; time varying risk premia; model misspecification;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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