NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Aggregate Implications of Indivisible Labor, Incomplete Markets, and Labor Market Frictions

Per Krusell, Toshihiko Mukoyama, Richard Rogerson, Aysegul Sahin

NBER Working Paper No. 13871
Issued in March 2008
NBER Program(s):   EFG

This paper analyzes a model that features frictions, an operative labor supply margin, and incomplete markets. We first provide analytic solutions to a benchmark model that includes indivisible labor and incomplete markets in the absence of trading frictions. We show that the steady state levels of aggregate hours and aggregate capital stock are identical to those obtained in the economy with employment lotteries, while individual employment and asset dynamics can be different. Second, we introduce labor market frictions to the benchmark model. We find that the effect of the frictions on the response of aggregate hours to a permanent tax change is highly non-linear. We also find that there is considerable scope for substitution between "voluntary" and "frictional" nonemployment in some situations.

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Document Object Identifier (DOI): 10.3386/w13871

Published: Krusell, Per & Mukoyama, Toshihiko & Rogerson, Richard & Sahin, Ayseg├╝l, 2008. "Aggregate implications of indivisible labor, incomplete markets, and labor market frictions," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 961-979, July.

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