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

New York University (NYU) - New York University, Abu Dhabi; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

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

New York University (NYU) - New York University, Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
564
Abstract Views
3,956
Rank
84,801
PlumX Metrics