MT - 06. RBC Labour Market Flashcards
Topic Summary (3)
- Efficiency wage models: there is some cost of lowering wages –> reduced productivity/efficiency
- Shapiro-Stiglitz: exogenous “hazard rate” of losing job, exogenous shirking detection, endogenous determination of job finding
- Search and matching models: heterogeneity amongst jobs and amongst workers –> “matching function” gives complex search process to changes in employment –> “frictional unemployment”
Efficiency Wage Models Summary (3)
Come from lack of ability to monitor effort perfectly
o Paying higher wages has clear benefits: productivity via nourishment, makes jobs valuable and being fired costly, higher quality of applicant pool, loyalty
o Drawback of trend in employment as economy grows –> LR no unemployment…?
Shapiro Stiglitz Summary (2)
o State values of being Employed, Unemployed and Shirking
o No shirking condition to incentivise effort –> asymmetric info on effort means jobs give surplus, reduced turnover as workers value jobs
Search and Matching Summary (5)
o Unemployment is largely transitional, people moving between jobs
o 4 Bellman equations for E, U, F and V
o CD Matching function –> LM tightness
o Nash Wage Bargaining –> Surplus split
o Vacancy value is 0 since it is free to post
Shapiro and Stiglitz (1984)
Aim: Explain involuntary unemployment via the employee-employer information structure, inability to costlessly observe effort
Conclusion: Costly monitoring –> Unemployment in equilibrium, Firms in wage raise race to avoid worker shirking
Hansen (1985)
Aim: Study a growth model with technology shocks, where labour is indivisible, so all variation is on employment extensive margin.
• Addresses critique of business cycle models: i.) lack of matching labour market phenomena, ii.) relying too heavily on willingness to substitute
• Models should allow for adjustment on both intensive and extensive margin to match the data.
• Hansen model works but is hard to digest –> How to interpret LM participation lottery?
- Mechanism relies on full HH insurance.
- Key parameter is disutility of work, we can pick this to match any given Hansen lottery or vice versa!
Conclusion: Unlike previous business cycle models there is large fluctuations in hours worked and small fluctuation in productivity independent of MRS leisure. Non convexities matter to standard deviations and matching data.
Rogerson (1988)
Aim: Indivisible labour discontinuity disappears in aggregate
Conclusion: Some non-convexities can wash out in aggregation. Optimal allocations involve lotteries over employment and consumption.
Mortensen and Pissarides (1994)
Pissarides (2000)
Diamond (1982), Mortensen (1982), Pissarides (1985)
Frictional unemployment via the S&M Model
Merz (1995)
– Introduce two sided search in LM into RBC propagates technology shocks, address RBC pitfalls
Dickens et. Al (1989)
– shirking in the US
Bulow and Summers (1986)
– extend SS model adding a new job type with effort that can be monitored –> jobs give no surplus to higher turnover
Alexopoulos (2004)
– shirkers get lower wage for k periods not fired –> Flat NSC –> Labour demand impacts employment not wages
Campbell and Kamlani (1997)
– price setter empirics, cutting wages not advisable as best workers would leave –> lay off workers then you can choose who leaves –> “adverse selection”. Focus on not cutting in a recession but may tell us about why firms pay more than needed in booms… quits have bigger impact in booms.
Weiss (1980)
– paying higher wages –> increased average ability applicant
Akerlof and Yellen (1990)
– evidence of worker effort attached to emotional feelings (influenced by wages) eg. Fairness considerations
