High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations

48 Pages Posted: 10 Sep 2021 Last revised: 31 May 2023

See all articles by Indrajit Mitra

Indrajit Mitra

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Taeuk Seo

University of Michigan, Stephen M. Ross School of Business

Yu Xu

University of Delaware

Date Written: May 31, 2023

Abstract

We establish an observational equivalence between unemployment fluctuations of
the Diamond-Mortensen-Pissarides search economy augmented with time-varying risk premia, and an otherwise identical economy without risk-premia but with a time-varying value of leisure. This equivalence holds for general risk-premia processes and allows us to view the effects of different models of risk-premia as operating through a single channel—one that alters the value of leisure. We derive simple expressions for semi-elasticities of labor market tightness with respect to productivity and risk premium shocks. We show wages can be used to detect misspecification in the discount rate process used in hiring decisions.

Keywords: Equivalence result, fundamental surplus, unemployment fluctuations, time-varying risk premia, heterogeneity, misspecification.

JEL Classification: E24, E32, E44, G10, J23, J63

Suggested Citation

Mitra, Indrajit and Seo, Taeuk and Xu, Yu, High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations (May 31, 2023). Available at SSRN: https://ssrn.com/abstract=3918535 or http://dx.doi.org/10.2139/ssrn.3918535

Indrajit Mitra

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Taeuk Seo

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Yu Xu (Contact Author)

University of Delaware ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

HOME PAGE: http://https://www.yuxufinance.net/

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