The Cyclical Volatility of Labor Markets under Frictional Financial Markets

40 Pages Posted: 16 Feb 2010 Last revised: 11 Aug 2012

See all articles by Nicolas Petrosky-Nadeau

Nicolas Petrosky-Nadeau

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Etienne Wasmer

Observatoire Fran├žais des Conjonctures Economiques (OFCE); Sciences Po; IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

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Date Written: June 20, 2012

Abstract

We provide a dynamic extension of an economy with search on credit and labor markets (Wasmer and Weil, 2004). Financial frictions create volatility: they add an additional, almost acyclical, entry cost to procyclical job creation costs, thus increasing the elasticity of labor market tightness to productivity shocks by a factor of 5 to 8, compared to a matching economy with perfect financial markets. We characterize a dynamic financial multiplier, that is increasing in total financial costs and minimized under a credit market Hosios-Pissarides rule. Financial frictions are an element of the solution to the volatility puzzle.

Keywords: Search, Financial Market Imperfections, Shimer Puzzle, Macroeconomic Volatility

JEL Classification: E32, E44, J63, J64

Suggested Citation

Petrosky-Nadeau, Nicolas and Wasmer, Etienne, The Cyclical Volatility of Labor Markets under Frictional Financial Markets (June 20, 2012). Available at SSRN: https://ssrn.com/abstract=1553108 or http://dx.doi.org/10.2139/ssrn.1553108

Nicolas Petrosky-Nadeau (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Etienne Wasmer

Observatoire Fran├žais des Conjonctures Economiques (OFCE) ( email )

69 Quai d'Orsay
Paris 75004
France

Sciences Po

56 rue Jacob
Paris Cedex 07, 75337
France

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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