Aggregate Implications of Indivisible Labor, Incomplete Markets, and Labor Market Frictions
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.
Earlier versions of this paper were presented at Princeton University, the University of Tokyo, the Federal Reserve Bank of Chicago and the 2007 SED conference. We thank Gadi Barlevy, Bob Hall and seminar and conference participants. The views expressed in this article are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York, the Federal Reserve System, or the National Bureau of Economic Research.
Krusell, Per & Mukoyama, Toshihiko & Rogerson, Richard & Sahin, Aysegül, 2008. "Aggregate implications of indivisible labor, incomplete markets, and labor market frictions," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 961-979, July. citation courtesy of