Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations

49 Pages Posted: 25 Aug 2009 Last revised: 1 Oct 2009

See all articles by Per Krusell

Per Krusell

Princeton University - Department of Economics; Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR)

Toshihiko Mukoyama

Georgetown University - Department of Economics; CIREQ

Aysegul Sahin

Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: August 2009

Abstract

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.

Suggested Citation

Krusell, Per L. and Mukoyama, Toshihiko and Sahin, Aysegul, Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations (August 2009). NBER Working Paper No. w15282, Available at SSRN: https://ssrn.com/abstract=1459583

Per L. Krusell (Contact Author)

Princeton University - Department of Economics ( email )

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Stockholm University - Institute for International Economic Studies (IIES) ( email )

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HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Toshihiko Mukoyama

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

CIREQ

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

Aysegul Sahin

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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