Rent Rigidity, Asymmetric Information, and Volatility Bounds in Labor Markets

B.A. Brugemann, G. Moscarini

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

Two thirds of US unemployment volatility is due to fluctuations in workers' job-finding rate. In search and matching models, aggregate productivity shocks generate such fluctuations: via inputs in the matching technology, they affect the rate at which workers and firms come into contact. Quantitatively, this mechanism has been found to be negligible in a calibrated textbook model, but also more than sufficient if wages are completely rigid. We study a weaker concept of rigidity based on worker rents (wages in excess of the value of unemployment). We show that volatility is subject to an upper bound if worker rents are weakly procyclical, thus at best rigid. Quantitatively, with Rent Rigidity, the mechanism accounts for at most 20% of the variance of the job-finding rate. In light of this result we reexamine the question whether asymmetric information on gains from trade amplifies fluctuations. We analyze a series of bargaining solutions, and conclude that asymmetric information at best makes rents rigid. Our analysis provides a unifying perspective on a very lively debate. © 2009 Elsevier Inc.
LanguageEnglish
Pages575-596
JournalReview of Economic Dynamics
Volume13
DOIs
Publication statusPublished - 2010

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Asymmetric volatility
Rigidity
Volatility bounds
Labour market
Rent
Asymmetric information
Workers
Fluctuations
Wages
Unemployment
Productivity shocks
Aggregate productivity
Upper bound
Gains from trade
Search and matching model
Bargaining solutions
Textbooks

Cite this

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title = "Rent Rigidity, Asymmetric Information, and Volatility Bounds in Labor Markets",
abstract = "Two thirds of US unemployment volatility is due to fluctuations in workers' job-finding rate. In search and matching models, aggregate productivity shocks generate such fluctuations: via inputs in the matching technology, they affect the rate at which workers and firms come into contact. Quantitatively, this mechanism has been found to be negligible in a calibrated textbook model, but also more than sufficient if wages are completely rigid. We study a weaker concept of rigidity based on worker rents (wages in excess of the value of unemployment). We show that volatility is subject to an upper bound if worker rents are weakly procyclical, thus at best rigid. Quantitatively, with Rent Rigidity, the mechanism accounts for at most 20{\%} of the variance of the job-finding rate. In light of this result we reexamine the question whether asymmetric information on gains from trade amplifies fluctuations. We analyze a series of bargaining solutions, and conclude that asymmetric information at best makes rents rigid. Our analysis provides a unifying perspective on a very lively debate. {\circledC} 2009 Elsevier Inc.",
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Rent Rigidity, Asymmetric Information, and Volatility Bounds in Labor Markets. / Brugemann, B.A.; Moscarini, G.

In: Review of Economic Dynamics, Vol. 13, 2010, p. 575-596.

Research output: Contribution to JournalArticleAcademicpeer-review

TY - JOUR

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AB - Two thirds of US unemployment volatility is due to fluctuations in workers' job-finding rate. In search and matching models, aggregate productivity shocks generate such fluctuations: via inputs in the matching technology, they affect the rate at which workers and firms come into contact. Quantitatively, this mechanism has been found to be negligible in a calibrated textbook model, but also more than sufficient if wages are completely rigid. We study a weaker concept of rigidity based on worker rents (wages in excess of the value of unemployment). We show that volatility is subject to an upper bound if worker rents are weakly procyclical, thus at best rigid. Quantitatively, with Rent Rigidity, the mechanism accounts for at most 20% of the variance of the job-finding rate. In light of this result we reexamine the question whether asymmetric information on gains from trade amplifies fluctuations. We analyze a series of bargaining solutions, and conclude that asymmetric information at best makes rents rigid. Our analysis provides a unifying perspective on a very lively debate. © 2009 Elsevier Inc.

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