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Labor Market Volatility in the RBC Search Model: A Look at Hagedorn and Manovskii’s Calibration

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  • Manoj Atolia

    (Florida State University
    International Monetary Fund)

  • John Gibson

    (Georgia State University)

  • Milton Marquis

    (Florida State University)

Abstract

The standard Diamond–Mortensen–Pissarides (DMP) labor search model generates low volatility in labor market variables relative to average labor productivity, the so-called Shimer puzzle. Hagedorn and Manovskii (Am Econ Rev 98(4):1692–1706, 2008) demonstrate that recalibrating the standard DMP model to be consistent with the small vacancy posting cost and wage elasticity observed in the data can resolve the Shimer puzzle. They close by stating that their calibration strategy would also resolve the Shimer puzzle in the real business cycle (RBC) search framework. In this paper, we examine their claim and find that their strategy resolves the Shimer puzzle in the RBC search model for linear preferences (with risk neutrality and infinite Frisch elasticity of labor supply), but falls significantly short for more standard assumptions on the degree of relative risk aversion (of 1–2) and Frisch elasticity (of 2–3), in line with empirical estimates. While our conclusions are based on highly accurate solutions using the Generalized Stochastic Simulation Algorithm, we also assess the accuracy of a frequently used linearization method and its implications for the assessment of labor market volatility.

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  • Manoj Atolia & John Gibson & Milton Marquis, 2018. "Labor Market Volatility in the RBC Search Model: A Look at Hagedorn and Manovskii’s Calibration," Computational Economics, Springer;Society for Computational Economics, vol. 52(2), pages 583-602, August.
    • Handle: RePEc:kap:compec:v:52:y:2018:i:2:d:10.1007_s10614-017-9701-9
    DOI: 10.1007/s10614-017-9701-9
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    Cited by:

    1. Dossche, Maarten & Lewis, Vivien & Poilly, Céline, 2019. "Employment, hours and the welfare effects of intra-firm bargaining," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 67-84.
    2. Noritaka Kudoh & Hiroaki Miyamoto, 2021. "General Equilibrium Effects and Labor Market Fluctuations," Working Papers SDES-2021-4, Kochi University of Technology, School of Economics and Management, revised May 2021.
    3. Manoj Atolia & John Gibson & Milton Marquis, 2019. "Moral Hazard in Lending and Labor Market Volatility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(1), pages 79-109, February.
    4. Gibson, John & Heutel, Garth, 2023. "Pollution and labor market search externalities over the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
    5. Tsasa, Jean-Paul K., 2022. "Labor market volatility in a fully specified RBC search model: An analytical investigation," Journal of Mathematical Economics, Elsevier, vol. 103(C).

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