High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations
35 Pages Posted: 10 Sep 2021 Last revised: 9 May 2022
Date Written: May 6, 2022
We establish an observational equivalence between the unemployment fluctuations of two economies: the Diamond-Mortensen-Pissarides (DMP) search economy augmented to feature time-varying risk premia, and an otherwise identical economy without risk premia but with a time-varying value of leisure. This equivalence 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 in the familiar setting of the DMP model. We use the equivalence to derive simple expressions for the semi-elasticities of labor market tightness with respect to productivity and risk premium shocks.
Keywords: Equivalence result, fundamental surplus, unemployment fluctuations, time-varying risk premia
JEL Classification: E24, E32, E44, G10, J23, J63
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