IDEAS home Printed from https://ideas.repec.org/a/kap/compec/v52y2018i2d10.1007_s10614-017-9701-9.html
   My bibliography  Save this article

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

Author

Listed:
  • 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.

Suggested Citation

  • 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
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10614-017-9701-9
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10614-017-9701-9?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kenneth L. Judd & Lilia Maliar & Serguei Maliar, 2011. "Numerically stable and accurate stochastic simulation approaches for solving dynamic economic models," Quantitative Economics, Econometric Society, vol. 2(2), pages 173-210, July.
    2. Costain, James S. & Reiter, Michael, 2008. "Business cycles, unemployment insurance, and the calibration of matching models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1120-1155, April.
    3. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2005. "Unemployment and vacancy fluctuations in the matching model: inspecting the mechanism," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 91(Sum), pages 19-50.
    4. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
    5. Jung, Philip & Kuester, Keith, 2011. "The (un)importance of unemployment fluctuations for the welfare cost of business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1744-1768, October.
    6. Felix Reichling & Charles Whalen, 2012. "Review of Estimates of the Frisch Elasticity of Labor Supply: Working Paper 2012-13," Working Papers 43676, Congressional Budget Office.
    7. Robert Shimer, 2010. "Labor Markets and Business Cycles," Economics Books, Princeton University Press, edition 1, number 9217.
    8. Dale Mortensen & Eva Nagypal, 2007. "More on Unemployment and Vacancy Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(3), pages 327-347, July.
    9. Christopher A. Pissarides, 2009. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," Econometrica, Econometric Society, vol. 77(5), pages 1339-1369, September.
    10. Wouter J. Den Haan & Albert Marcet, 1994. "Accuracy in Simulations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(1), pages 3-17.
    11. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    12. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
    13. Robert E. Hall & Paul R. Milgrom, 2008. "The Limited Influence of Unemployment on the Wage Bargain," American Economic Review, American Economic Association, vol. 98(4), pages 1653-1674, September.
    14. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, vol. 75(4), pages 676-690, September.
    15. Robert E. Hall, 2009. "Reconciling Cyclical Movements in the Marginal Value of Time and the Marginal Product of Labor," Journal of Political Economy, University of Chicago Press, vol. 117(2), pages 281-323, April.
    16. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
    17. Christiano, Lawrence J, 2002. "Solving Dynamic Equilibrium Models by a Method of Undetermined Coefficients," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 21-55, October.
    18. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    19. den Haan, Wouter J & Marcet, Albert, 1990. "Solving the Stochastic Growth Model by Parameterizing Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 31-34, January.
    20. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    21. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    22. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-132, March.
    23. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rogerson, Richard & Shimer, Robert, 2011. "Search in Macroeconomic Models of the Labor Market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 7, pages Pages: 61, Elsevier.
    2. Yaniv Yedid-Levi, 2016. "Why does employment in all major sectors move together over the business cycle?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 131-156, October.
    3. 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).
    4. Lawrence J. Christiano & Martin S. Eichenbaum & Mathias Trabandt, 2016. "Unemployment and Business Cycles," Econometrica, Econometric Society, vol. 84(4), pages 1523-1569, July.
    5. Bodenstein, Martin & Kamber, Güneş & Thoenissen, Christoph, 2018. "Commodity prices and labour market dynamics in small open economies," Journal of International Economics, Elsevier, vol. 115(C), pages 170-184.
    6. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, February.
    7. Alejandro Justiniano & Claudio Michelacci, 2011. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies in the US and Europe," NBER Working Papers 17429, National Bureau of Economic Research, Inc.
    8. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    9. Gabriel Chodorow-Reich & Loukas Karabarbounis, 2016. "The Cyclicality of the Opportunity Cost of Employment," Journal of Political Economy, University of Chicago Press, vol. 124(6), pages 1563-1618.
    10. Sveen, Tommy & Weinke, Lutz, 2008. "New Keynesian perspectives on labor market dynamics," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 921-930, July.
    11. Alejandro Justiniano & Claudio Michelacci, 2012. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies in the United States and Europe," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 8(1), pages 169-235.
    12. Burcu Eyigungor, 2010. "Specific Capital and Vintage Effects on the Dynamics of Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 100(3), pages 1214-1237, June.
    13. Sergio A. Lago Alves, 2018. "Monetary Policy, Trend Inflation, and Unemployment Volatility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(4), pages 637-673, June.
    14. Ryan Chahrour & Sanjay K. Chugh & Tristan Potter, 2014. "Searching for Wages in an Estimated Labor Matching Model," Boston College Working Papers in Economics 867, Boston College Department of Economics, revised 20 Dec 2016.
    15. Martin Gervais & Nir Jaimovich & Henry E. Siu & Yaniv Yedid‐Levi, 2015. "Technological Learning And Labor Market Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(1), pages 27-53, February.
    16. Matthias S. Hertweck & Vivien Lewis & Stefania Villa, 2021. "Going the Extra Mile: Effort by Workers and Job‐Seekers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(8), pages 2099-2127, December.
    17. Yashiv, Eran, 2007. "Labor search and matching in macroeconomics," European Economic Review, Elsevier, vol. 51(8), pages 1859-1895, November.
    18. Leena Rudanko, 2008. "Aggregate and Idiosyncratic Risk in a Frictional Labor Market," Boston University - Department of Economics - Working Papers Series wp2008-009, Boston University - Department of Economics.
    19. Sergio A. Lago Alves, 2012. "Trend Inflation and the Unemployment Volatility Puzzle," Working Papers Series 277, Central Bank of Brazil, Research Department.
    20. Domenico Ferraro, 2018. "The Asymmetric Cyclical Behavior of the U.S. Labor Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 145-162, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:compec:v:52:y:2018:i:2:d:10.1007_s10614-017-9701-9. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.