Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations

Per Krusell, Toshihiko Mukoyama, Aysegul Sahin

NBER Working Paper No. 15282
Issued in August 2009
NBER Program(s):Economic Fluctuations and Growth

We analyze a Bewley-Huggett-Aiyagari incomplete-markets model with labor-market frictions. Consumers are subject to idiosyncratic employment shocks against which they cannot insure directly. The labor market has a Diamond-Mortensen-Pissarides structure: firms enter by posting vacancies and match with workers bilaterally, with match probabilities given by an aggregate matching function. Wages are determined through Nash bargaining. We also consider aggregate productivity shocks, and a complete set of contingent claims conditional on this risk.

We use the model to evaluate a tax-financed unemployment insurance scheme. Higher insurance is beneficial for consumption smoothing, but because it raises workers' outside option value, it discourages firm entry. We find that the latter effect is more potent for welfare outcomes; we tabulate the effects quantitatively for different kinds of consumers. We also demonstrate that productivity changes in the model---in steady state as well as stochastic ones---generate rather limited unemployment effects, unless workers are close to indifferent between working and not working; thus, recent findings are corroborated in our more general setting.

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Document Object Identifier (DOI): 10.3386/w15282

Published: PER KRUSELL & TOSHIHIKO MUKOYAMA & AYŞEG√úL ŞAHIN, 2010. "Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations," Review of Economic Studies, Blackwell Publishing, vol. 77(4), pages 1477-1507, October. citation courtesy of

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