The Aggregate Effects of Labor Market Frictions

61 Pages Posted: 22 Nov 2017

See all articles by Michael Elsby

Michael Elsby

School of Economics, University of Edinburgh

David Ratner

Board of Governors of the Federal Reserve System

Ryan Michaels

Federal Reserve Bank of Philadelphia

Date Written: 2017-11-21

Abstract

Labor market frictions are able to induce sluggish aggregate employment dynamics. However, these frictions have strong implications for the source of this propagation: They distort the path of aggregate employment by impeding the flow of labor across firms. For a canonical class of frictions, we show how observable measures of such flows can be used to assess the effect of frictions on aggregate employment dynamics. Application of this approach to establishment microdata for the United States reveals that the empirical flow of labor across firms deviates markedly from the predictions of canonical labor market frictions. Despite their ability to induce persistence in aggregate employment, firm-size flows in these models are predicted to respond aggressively to aggregate shocks but react sluggishly in the data. This paper therefore concludes that the propagation mechanism embodied in standard models of labor market frictions fails to account for the sources of observed employment dynamics.

Keywords: Labor market frictions, firm dynamics, adjustment costs

JEL Classification: E32, J63, J64

Suggested Citation

Elsby, Michael and Ratner, David and Michaels, Ryan, The Aggregate Effects of Labor Market Frictions (2017-11-21). FRB of Philadelphia Working Paper No. 17-40, Available at SSRN: https://ssrn.com/abstract=3075846

Michael Elsby (Contact Author)

School of Economics, University of Edinburgh ( email )

31 Buccleuch Place
Edinburgh, EH8 9JT
United Kingdom

David Ratner

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Ryan Michaels

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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