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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.
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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 

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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

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