The consumption-tightness puzzle
Ravn, Morten O. (2007) The consumption-tightness puzzle. In, Acemoglu, Daron, Rogofff, Kenneth and Woodford, Michael (eds.) NBER Macroeconomics Annual 2006. NBER International Seminar on Macroeconomics 2006 Cambridge, USA, Massachusetts Institute of Technology Press, 39pp.
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This paper introduces a labor force participation choice into a labor market
matching model embedded in a dynamic stochastic general equilibrium set-up
with production and savings. The participation choice is modelled as a tradeoff
between forgoing the expected benefits of being search active and engaging
in costly labor market search. The model induces a symmetry in firms’ and
workers’ search decision since both sides of the labor market vary search effort
at the extensive margins. We show that this set-up is of considerable analytical
convenience and that it gives rise to a linear relationship between labor market
tightness and the marginal utility of consumption. We refer to the latter as
the “consumption - tightness puzzle” because (a) it gives rise to a number
of counterfactual implications, and (b) it is a robust implication of theory.
Amongst the counterfactual implications are very low volatility of tightness,
procyclical unemployment, and a positively sloped Beveridge curve. These
implications all derive from procyclical variations in participation rates that
follow from allowing for the extensive search margin.
|Item Type:||Book Section|
|Keywords:||labor market participation, matching models, intensive search margin, labor market tightness, unemployment, homework.|
|Subjects:||H Social Sciences > H Social Sciences (General)|
|Divisions:||University Structure - Pre August 2011 > School of Social Sciences
|Date Deposited:||09 Aug 2007|
|Last Modified:||02 Mar 2012 11:49|
|Contributors:||Ravn, Morten O. (Author)
Acemoglu, Daron (Editor)
Rogofff, Kenneth (Editor)
Woodford, Michael (Editor)
|Publisher:||Massachusetts Institute of Technology Press|
|RDF:||RDF+N-Triples, RDF+N3, RDF+XML, Browse.|
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