High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations
53 Pages Posted: 10 Sep 2021 Last revised: 28 Oct 2022
Date Written: October 26, 2022
We establish an observational equivalence between unemployment fluctuations of two economies: the Diamond-Mortensen-Pissarides (DMP) 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 specifications of risk-premia process and also with heterogeneity in worker productivity. The 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 benchmark DMP model. We 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, heterogeneity
JEL Classification: E24, E32, E44, G10, J23, J63
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