Aggregate and Idiosyncratic Risk in a Frictional Labor Market

Leena Rudanko ()
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Leena Rudanko: Boston University, Department of Economics

No wp2008-009, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: Economists face difficulties explaining the strong cyclicality of US unemployment. This paper contributes both by developing modeling tools and evaluating a potentially important explanation. The paper develops a parsimonious equilibrium model of job search with aggregate productivity shocks, where i) workers face incomplete markets, and ii) wages are determined via optimal long-term contracts. Despite the large state space associated with long-term contracting, the equilibrium has a simple representation as a small system of differential equations. Incomplete markets amplify fluctuations in unemployment, and the results suggest an upper bound on how far they can go in explaining unemployment cyclicality.

Keywords: Unemployment; Wages; Business Cycles; Search; Dynamic Contracts; Incomplete Markets (search for similar items in EconPapers)
JEL-codes: D52 E24 E32 J41 J64 (search for similar items in EconPapers)
Pages: 47
Date: 2008-07
New Economics Papers: this item is included in nep-bec, nep-dge and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Aggregate and Idiosyncratic Risk in a Frictional Labor Market (2010)
Working Paper: Aggregate and Idiosyncratic Risk in a Frictional Labor Market (2009)
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