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Relative Prices in a Frictional Labor Market

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  • Michael Lim

Abstract

Empirical data suggests that the relative price of goods and services may play a role in individual labor supply decisions. Data shows that individuals spend a significant amount of their time at home engaged in activities such as child care, education, and elderly care, among others, which are substitutible with relatively expensive market services. From 2000 and onward, the relative price of services and the labor participation rate have shown a negative relationship. In this paper, the role of relative prices in a frictional, two sector labor market is examined. Adapting the labor search model presented in Garibaldi and Wasmer (2005) to incorporate relative price effects, we show that the introduction of relative prices has both partial and general equilibrium effects on entry and exit margins, which tend to reduce labor market participation. The model is then calibrated and taken to US data from the 2000s (to be done).

Suggested Citation

  • Michael Lim, "undated". "Relative Prices in a Frictional Labor Market," GSIA Working Papers 2014-E22, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:222365889
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    References listed on IDEAS

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    1. 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.
    2. repec:hal:spmain:info:hdl:2441/8921 is not listed on IDEAS
    3. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-1187, December.
    4. Pietro Garibaldi & Etienne Wasmer, 2005. "Equilibrium Search Unemployment, Endogenous Participation, And Labor Market Flows," Journal of the European Economic Association, MIT Press, vol. 3(4), pages 851-882, June.
    5. Nicolas Petrosky-Nadeau & Guillaume Rocheteau, "undated". "Unemployment, Financial Frictions, and the Housing Market," GSIA Working Papers 2013-E4, Carnegie Mellon University, Tepper School of Business.
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    7. repec:hal:wpspec:info:hdl:2441/8921 is not listed on IDEAS
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