Hostname: page-component-848d4c4894-4rdrl Total loading time: 0 Render date: 2024-07-08T02:20:45.949Z Has data issue: false hasContentIssue false
  • English
  • Français

DIMINISHING RETURNS AND LABOR MARKET ADJUSTMENTS

Published online by Cambridge University Press:  27 June 2017

Ha Dao  and
Alain Delacroix
Ha Dao
Affiliation:
WSP Parsons Brinckerhoff
Alain Delacroix*
Affiliation:
Université du Québec à Montréal and CIRPÉE
*
Address correspondence to: Alain Delacroix, Département des sciences économiques, Université du Québec à Montréal, Case postale 8888, Succ. Centre-Ville, Montréal, QC H3C 3P8, Canada; e-mail: delacroix.alain@uqam.ca.
Get access Rights & Permissions [Opens in a new window]

Abstract

We amend the canonical matching model by assuming diminishing returns to labor. We put the model to the twin test of generating a high volatility of labor market variables in response to productivity shocks (the “Shimer puzzle”) and a moderate response to changes in unemployment benefits and find that it passes that test. It does not feature wage rigidity, nor is it based on a small surplus calibration. Diminishing returns introduce a distinction between marginal and average surplus. With a standard (large average surplus) calibration, we can have a small marginal surplus, and thus a strong response of hiring to productivity shocks, while obtaining a measured response of unemployment to changes in benefits.

Keywords

Diminishing ReturnsMatching FrictionsBusiness-Cycle FluctuationsLabor Market Policy
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 8 , December 2018 , pp. 2088 - 2106
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We gratefully thank the associate editor and two referees for their very insightful comments which very much improved the paper, as well as Steve Ambler, Markus Poschke, Pavel Ševčík, and Etienne Wasmer, and all the participants at the Midwest Macroeconomic Meetings (2010), the 10th Doctoral Workshop in Economic Theory and Econometrics (2010) and the Canadian Economic Association Meetings (2012). Delacroix would like to acknowledge the Social Sciences and Humanities Research Council of Canada for financial support.

References

REFERENCES

Abowd, John and Lemieux, Thomas (1993) The effects of product market competition on collective bargaining agreements: The case of foreign competition in Canada. Quarterly Journal of Economics 108, 983–1014.Google Scholar
Acemoglu, Daron and Hawkins, William (2014) Search with multi-worker firms. Theoretical Economics 9, 583–628.Google Scholar
Axtell, Robert (2001) Zipf distribution of U.S. firm sizes. Science 293, 1818–1820.Google Scholar
Blanchard, Olivier and Giavazzi, Francesco (2003) Macroeconomic effects of regulation and deregulation in goods and labor markets. Quarterly Journal of Economics 118, 879–908.Google Scholar
Blanchflower, David, Oswald, Andrew, and Sanfey, Peter (1996) Wages, profits, and rent-sharing. Quarterly Journal of Economics 111, 227–251.Google Scholar
Bruegemann, Bjoern and Moscarini, Giuseppe (2010) Rent rigidity, asymmetric information, and volatility bounds in labor markets. Review of Economic Dynamics 13, 575–596.Google Scholar
Cacciatore, Matteo and Fiori, Giuseppe (2016) The macroeconomic effects of goods and labor markets deregulation. Review of Economic Dynamics 20, 1–24.Google Scholar
Cahuc, Pierre, Marque, François, and Wasmer, Etienne (2008) A theory of wages and labor demand with intra-firm bargaining and matching frictions. International Economic Review 49, 943–972.Google Scholar
Christofides, Louis and Oswald, Andrew (1992) Real wage determination and rent-sharing in collective bargaining agreements. Quarterly Journal of Economics 107, 985–1002.Google Scholar
Costain, James and Reiter, Michael (2008) Business cycle, unemployment insurance, and the calibration of matching models. Journal of Economic Dynamics and Control 32, 1120–1155.Google Scholar
Delacroix, Alain (2006) A multisectorial matching model of unions. Journal of Monetary Economics 53, 573–596.Google Scholar
Den Haan, Wouter, Ramey, Garey, and Watson, Joel (2000) Job destruction and propagation of shocks. American Economic Review 90, 482–498.Google Scholar
Djankov, Simeon, La Porta, Rafael, Lopez-de-Silanes, Florencio, and Shleifer, Andrei (2002) The regulation of entry. Quarterly Journal of Economics 117, 1–37.Google Scholar
Ebell, Monique and Christian Haefke (2009) Product market deregulation and the U.S. employment miracle. Review of Economic Dynamics 12, 479–504.Google Scholar
Elsby, Michael and Michaels, Ryan (2013) Marginal jobs, heterogeneous firms, and unemployment flows. American Economic Journal: Macroeconomics 5, 1–48.Google Scholar
Felbermayr, Gabriel and Prat, Julien (2011) Product market regulation, firm selection and unemployment. Journal of the European Economic Association 9, 278–318.Google Scholar
Felbermayr, Gabriel, Prat, Julien, and Schmerer, Hans-Jörg (2011) Globalization and labor market outcomes: Wage bargaining, search frictions and firm heterogeneity. Journal of Economic Theory 146, 39–73.Google Scholar
Hagedorn, Marcus and Iourii Manovskii (2008) The cyclical behavior of equilibrium unemployment and vacancies revisited. American Economic Review 98, 1692–1706.Google Scholar
Hall, Robert (2005) Employment fluctuations with equilibrium wage stickiness. American Economic Review 95, 50–65.Google Scholar
Hall, Robert and Milgrom, Paul (2008) The limited influence of unemployment on the wage bargain. American Economic Review 98, 1653–1674.Google Scholar
Helpman, Elhanan and Oleg Itskhoki (2010) Labor market rigidities, trade and unemployment. Review of Economic Studies 77, 1100–1137.Google Scholar
Helpman, Elhanan, Itskhoki, Oleg, and Redding, Stephen (2010) Inequality and unemployment in a global economy. Econometrica 78, 1239–1283.Google Scholar
Hildreth, Andrew and Andrew Oswald (1997) Rent-sharing and wages: Evidence from company and establishment panels. Journal of Labor Economics 15, 318–337.Google Scholar
Hornstein, Andreas, Krusell, Per, and Violante, Giovanni (2005) Unemployment and vacancy fluctuations in the matching model: Inspecting the mechanism. Federal Reserve Bank of Richmond Economic Quarterly 91, 19–51.Google Scholar
Hornstein, Andreas, Krusell, Per, and Violante, Giovanni (2007) Modelling Capital in Matching Models: Implications for Unemployment Fluctuations. Mimeo.Google Scholar
Hosios, Arthur (1990) On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57, 279–298.Google Scholar
Layard, Richard and Nickell, Stephen (1999) Labour market institutions and economic performance. In Ashenfelter, Orley and Card, David (eds.), Handbook of Labour Economics, vol. 3c, pp. 3029–3084. New York: North Holland Elsevier.Google Scholar
Martins, Joaquim, Scarpetta, Stefano, and Pilat, Dirk (1996) Mark-up pricing, market structure and the business cycle. OECD Economic Studies 27, 71–105.Google Scholar
Melitz, Marc (2003) The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71, 1695–1725.Google Scholar
Miyamoto, Hiroaki (2011) Cyclical behavior of a matching model with capital investment. BE Journal of Macroeconomics 11 (Topics), Article 2.Google Scholar
Mortensen, Dale and Nagypál, Éva (2007) More on unemployment and vacancy fluctuations. Review of Economic Dynamics 10, 327–347.Google Scholar
Petrosky-Nadeau, Nicolas (2014) Credit, vacancies and unemployment fluctuations. Review of Economic Dynamics 17, 191–205.Google Scholar
Pissarides, Christopher (2000) Equilibrium Unemployment Theory. Cambridge, MA: MIT Press.Google Scholar
Pissarides, Christopher (2009) The unemployment volatility puzzle: Is wage stickiness the answer? Econometrica 77, 1339–1369.Google Scholar
Rogerson, Richard, Visschers, Lodewijk, and Wright, Randall (2009) Labor market fluctuations in the small and in the large. International Journal of Economic Theory 5, 125–137.Google Scholar
Shimer, Robert (2004) The consequences of rigid wages in search models. Journal of the European Economic Association (Papers and Proceedings) 2, 469–479.Google Scholar
Shimer, Robert (2005) The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review 95, 25–49.Google Scholar
Smith, Eric (1999) Search, concave production and optimal firm size. Review of Economic Dynamics 2, 456–471.Google Scholar
Stole, Lars and Zwiebel, Jeffrey (1996) Intra-firm bargaining under non-binding contracts. Review of Economic Studies 63, 375–410.Google Scholar
Van Reenen, John (1996) The creation and capture of rents: Wages and innovation in a panel of U.K. companies. Quarterly Journal of Economics 111, 195–226.Google Scholar