Kiel Working Papers, Kiel Institute for World Economics
No 1684:
Efficiency in a Model of Labor Selection
Sanjay Chugh and Christian Merkl
Abstract: We characterize efficient allocations and business cycle
fluctuations in a labor selection model. Due to forward-looking hiring and
labor supply decisions, efficiency entails both static and intertemporal
margins. We develop welfare-relevant measures of marginal rates of
transformation and efficiency along each margin that nest their
counterparts in frictionless labor markets. In a calibrated version of the
model, efficient fluctuations feature highly volatile unemployment and
job-finding rates, in line with empirical evidence. We show analytically in
a simplified version of the model that volatility arises from selection
effects, rather than general equilibrium effects. We also develop
sufficient conditions on wages, which are independent of the
wage-determination process, that decentralize efficient allocations. Unlike
the Hosios condition for matching models, there is no simple restriction on
Nash bargaining that guarantees that Nash wages can support efficient
allocations. Cyclical fluctuations in the Nash-bargaining economy display
even larger amplification of productivity shocks into labor market outcomes
than in the efficient economy, without extreme assumptions about bargaining
shares, inflexibility of wages, or the size of surpluses that govern labor
demand. The results establish normative and positive foundations for DSGE
labor selection models
Keywords: labor market frictions, efficiency, amplification, selection; (follow links to similar papers)
JEL-Codes: E24,; E32,; J20; (follow links to similar papers)
64 pages, February 2011
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Downloadable files:
kwp-1684.pdf
Download Statistics
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design Joakim Ekebom