Financial Disruptions and the Cyclical Upgrading of Labor

IMF Working Papers, June 8, 2017

Source details

Authors: Brendan Epstein, Alan Finkelstein Shapiro, Andrés González Gómez
Date: June 8, 2017
Core question: How do job-to-job flows (on-the-job search, OTJ search) interact with financial shocks versus total factor productivity (TFP) shocks in a general equilibrium labor-search framework?
Key outcome: The interaction of OTJ search with financial shocks differs sufficiently from its interaction with TFP shocks that, under standard calibrations, the model generates aggregate dynamics closely matching key U.S. macro data across several decades and in the wake of the Global Financial Crisis.

Amid TFP shocks, job-to-job flows amplify the volatility of unemployment.
The aggregate implications of job-to-job flows amid financial shocks had been less understood prior to this work.
With OTJ search incorporated and the differential impact of TFP and financial shocks explicitly modeled:
- The model yields relatively high volatilities of consumption, labor income, and unemployment, consistent with the data.
- This result helps resolve two limitations of existing general equilibrium labor-search theory:
- Models without OTJ search generate implausibly low unemployment volatility under standard calibrations.
- Models with OTJ search produce unemployment volatility closer to the data but typically at the expense of implausibly low consumption and labor-income volatility.
The model’s aggregate dynamics are "exceedingly in line" with U.S. macro data "across several decades and in the wake of the Global Financial Crisis."

Framework: General equilibrium labor-search model that incorporates on-the-job (OTJ) search.
Distinct treatment of shocks: Separately accounts for the differential impact of TFP shocks and financial shocks.
Mechanistic insight: The interaction between OTJ search and financial shocks operates differently from the interaction between OTJ search and TFP shocks, producing empirically realistic volatilities across multiple macroeconomic aggregates.

Subject: Income, Labor, National accounts, Production, Total factor productivity, Unemployment, Wages
Keywords: business cycle, Business cycles, collateral constraint, discount factor, financial frictions, Global, Income, labor income, labor market, labor search frictions, market tightness, maximization problem, on-the-job search, OTJ search, recruiting decision, TFP shock, Total factor productivity, Unemployment, wage bill, Wages, WP

Financial Disruptions and the Cyclical Upgrading of Labor, WP/17/131, June 2017
- Financial Disruptions and the Cyclical Upgrading of Labor, WP/17/131, June 2017 (Markdown version)
- Financial Disruptions and the Cyclical Upgrading of Labor, WP/17/131, June 2017 (PDF)