Lecture2
Lecture2
Adrien Bilal
Spring 2024
Harvard
Introduction
Recap: Unemployment Facts
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Some History
From Keynes to the DMP Model
• Keynes hypothesized that low aggregate (goods) demand leads to low output
I Low labor demand & high unemployment
• Two difficulties
I In the NK model, only (mostly) intensive margin and need very high Frisch
F Can use employment lotteries ⇒ Do we observe them in practice?
I No simultaneous flows in and out of unemployment
I
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Setup
Preferences
• Discrete time t = 0, 1, ..., ∞
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Technology: Production
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Technology: Search and Matching
• A vacant firm (i.e. without a worker) incurs a vacancy cost c every period
• A vacant firm posts one vacancy per period (again immaterial under CRS)
I Denote vt the equilibrium measure of vacancies
I A competitive fringe of firms stands ready to enter and post vacancies
Mt = M(ut , vt )
I Mt matches formed every period
I Today use Cobb-Douglas
M(u, v ) = mu α v 1−α
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Matching in the Labor Market (1/2)
• Useful to define labor market tightness
vt
θt =
ut
• Probability of unemployed finding a job in current period
Mt
ft = −→ f (θ) = mθ1−α
ut
I We assumed random matching
I Matches distributed randomly to unemployed workers
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Lecture 1: Vacancies and the Job Finding Rate
1
.75
.5
log UE (de-meaned)
.25
0
-.25
-.5
-.75
-1
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Value Functions
Value Functions
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Surpluses
• The worker surplus is E − U and satisfies
Et − Ut = wt − b + βft Et [Et+1 − Ut+1 ] + β(1 − s)Et [Et+1 − Ut+1 ]
| {z }
foregone search value
c = βqt Et [Jt+1 ]
I Vacancy creation adjusts until the cost equals expected future benefits
I Equilibrating force through qt = m (vt /ut )−α
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Wage Determination
Non Competitive Labor Market
• Cannot use the usual notion of labor market clearing to determine wages
• Instead, workers and firms face a bilateral monopoly when they meet
I If firm walks away, worker loses wage this period and must search again
I If worker walks away, firm loses profits this period and must search again
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Generalized Nash Bargaining
• Firms have no commitment power: cannot announce wage and stick to it
• Wage such that surplus is split between worker and firm with shares γ, 1 − γ:
wt = argmax(Et (w ) − Ut )γ Jt (w )1−γ
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Equilibrium Wage
• Surplus-sharing rule implies:
wt = (1 − γ) b + βft γEt [St+1 ] + γzt
wt = (1 − γ)b + γ(zt + θt c)
ut+1 − ut = s(1 − ut ) − ft ut
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Comparative Statics
Steady-State
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Steady-State: First Pass (1)
• To gain intuition, log-linearize w.r.t. z:
1−γ dz
dθ =
γ + α(r + s)/f c
1−γ z −b
θ ≈
γ c
s 1 s α
log u ≈ log − (1 − α) log θ ⇐⇒ log v ≈ log − log u
m 1−α m 1−α
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Steady-State: First Pass (2)
1−γ z −b 1 s α
θ≈ , log v ≈ log − log u
γ c 1−α m 1−α
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The Beveridge Curve: Data & DMP
9
8.5
log vacancies
8
7.5
1 1.5 2 2.5 3
1 s α
log v ≈ log − log u
1−α m 1−α
• With α ≈ 0.6 Beveridge curve has slope ≈ −1 as in data
I Is this surprising? Not so much
I Beveridge curve & matching fct regressions fit combinations of (log v , log u)
• Shift of Beveridge curve during Great Recession: m ↓
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Steady-State: Comparative Statics w.r.t. Productivity
• Log-linearize w.r.t. z:
du r + s + γf z dz
= − (1 − u) (1 − α)
u α(r + s) + γf z −b z
| {z }
≈1 when r ,sf
• Log-linearize w.r.t r , s f :
du z dz
u = cste × (z − b)−(1−α) =⇒ = −(1 − α)
u z −b z
• Steady-state comparative statics also informative about effect of shocks
I Recall that transitions in stock-flow model are virtually instantaneous
• In data
du
I
u
∼ 20 − 30%
Y dz
I If use labor productivity z = N
, z
∼ 2%
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A First Resolution?
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Unpacking the Unemployment Volatility Puzzle
1
θ ≈ × (1 − γ)(z − b)
γc
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Job Creation
Free Entry and Job creation Costs (1/2)
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Free Entry and Job creation Costs (2/2)
1−γ z −b du 1−α z dz
θ1+αν ≈ cste , ≈−
γ c0 u 1 + αν z − b z
• Departures from linear cost do not resolve the unemployment volatility puzzle
I Convex costs make tightness even less responsive to shocks
I Needed tightness more responsive to shocks!
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Wage Rigidity
Wage Rigidity in the DMP Model
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Another Wage Setting Mechanism
• Any agreed upon wage must make
I Workers better off than being unemployed
I Firms better off than being vacant
Et (w ) ≥ Ut
Jt (w ) ≥ 0
du
3. Obtains u ∼ 0.2 as in the data
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Why Do Rigid Wages Work?
• No “surplus sharing” out of steady-state: Jt 6= γSt
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Bonus
Other resolutions
• Stock market valuations shocks rather than productivity (Kehoe et al. 2021)
I z should reflect firm’s valuation of jobs, stock market fluctuates much more
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