Invariance of unemployment and vacancy dynamics with respect to diminishing returns to labor at the firm level

Björn Brügemann

doi:10.1016/j.red.2023.09.002

Invariance of unemployment and vacancy dynamics with respect to diminishing returns to labor at the firm level

Björn Brügemann^*

^*Corresponding author for this work

Research output: Contribution to Journal › Article › Academic › peer-review

Abstract

This paper shows analytically that introducing diminishing returns to labor at the firm level into the Diamond-Mortensen-Pissarides model, followed by recalibration, does not change aggregate dynamics of unemployment and vacancies. This invariance result holds for several standard calibration strategies developed for the model with constant returns, alternative bargaining solutions for the setting with diminishing returns, and different sources of diminishing returns. Invariance makes precise in which sense the common practice of abstracting from diminishing returns is innocuous. It provides an analytical benchmark for quantitative findings obtained in models that do combine a Diamond-Mortensen-Pissarides labor market with diminishing returns at the firm level.

Original language	English
Pages (from-to)	915-942
Journal	Review of Economic Dynamics
Volume	51
DOIs	https://doi.org/10.1016/j.red.2023.09.002
Publication status	Published - 2023

Bibliographical note

Funding Information:
I am grateful to the editor, Loukas Karabarbounis, and two anonymous referees for their suggestions on how to improve the paper. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

Publisher Copyright:
© 2023 The Author(s)

Keywords

Aggregate unemployment dynamics
Bargaining
Calibration
Diamond-Mortensen-Pissarides model
Diminishing returns

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10.1016/j.red.2023.09.002

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AB - This paper shows analytically that introducing diminishing returns to labor at the firm level into the Diamond-Mortensen-Pissarides model, followed by recalibration, does not change aggregate dynamics of unemployment and vacancies. This invariance result holds for several standard calibration strategies developed for the model with constant returns, alternative bargaining solutions for the setting with diminishing returns, and different sources of diminishing returns. Invariance makes precise in which sense the common practice of abstracting from diminishing returns is innocuous. It provides an analytical benchmark for quantitative findings obtained in models that do combine a Diamond-Mortensen-Pissarides labor market with diminishing returns at the firm level.

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Invariance of unemployment and vacancy dynamics with respect to diminishing returns to labor at the firm level

Abstract

Bibliographical note

Keywords

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Cite this