Journal Article

Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations

Per Krusell, Toshihiko Mukoyama and Ayşegül Şahin

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 77, issue 4, pages 1477-1507
Published in print October 2010 | ISSN: 0034-6527
Published online October 2010 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2010.00700.x
Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations

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We analyse a Bewley-Huggett-Aiyagari incomplete-markets model with labour-market frictions. Consumers are subject to idiosyncratic employment shocks against which they cannot insure directly. The labour market has a Diamond-Mortensen-Pissarides structure: firms enter by posting vacancies and match with workers bilaterally, with match probabilities given by an aggregate matching function. Wages are determined through Nash bargaining. We also consider aggregate productivity shocks and a complete set of contingent claims conditional on this risk. We use the model to evaluate a tax-financed unemployment insurance scheme. Higher insurance is beneficial for consumption smoothing, but because it raises workers' outside option value, it discourages firm entry. We find that the latter effect is more potent for welfare outcomes; we tabulate the effects quantitatively for different kinds of consumers. We also demonstrate that productivity changes in the model—in steady state as well as stochastic ones—generate rather limited unemployment effects, unless workers are close to indifferent between working and not working; thus, recent findings are corroborated in our more general setting.

Journal Article.  13550 words.  Illustrated.

Subjects: Economics

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