“Declining Search Frictions, Unemployment and Growth,” with Paolo Martellini, NBER Working Paper (November 2018).
The Diamond-Mortensen-Pissarides theory argues that unemployment and vacancies emerge because of search frictions in the labor market. Yet, over the last century, US unemployment and vacancy rates show no trend, even though search efficiency in the labor market must have improved thanks to the diffusion of telephones, computers and the Internet. We resolve this puzzle using a search model where firm-worker matches are inspection goods. We show that iff the distribution of idiosyncratic productivity for new matches is Pareto, then unemployment, vacancy, job-finding and job-loss rates remain constant while the efficiency of search grows over time. Improvements in search technology show up in productivity growth. A corollary of our theory is that population growth does not affect unemployment and vacancy rates even under non-constant returns to scale in the search process. We develop and implement a strategy to measure the growth rate of the search technology, the returns to scale of the search process, and their contribution to productivity growth.
“Production and Learning in Teams,” with Kyle Herkenhoff, Jeremy Lise and Gordon Phillips, Manuscript (October 2018).
The effect of coworkers on the learning and the productivity of an individual is measured combining theory and data. The theory is a frictional equilibrium model of the labor market in which production and the accumulation of human capital of an individual are allowed to depend on the human capital of coworkers. The data is a matched employer-employee dataset of US firms and workers. The measured production function is supermodular. The measured human capital function is non-linear: Workers catch-up to more knowledgeable coworkers, but are not dragged-down by less knowledgeable ones. The market equilibrium features a pattern of sorting of coworkers across teams that is inefficiently positive. This inefficiency results in low human capital individuals having too few chances to learn from more knowledgeable coworkers and, in turn, in a stock of human capital and a flow of output that are inefficiently low.
“Agency Business Cycles,” with Mikhail Golosov, NBER Working Paper 21743, Reject and Revise at Econometrica (January 2018).
We develop a theory of endogenous and stochastic fluctuations in aggregate economic activity. Individual firms choose to randomize over firing or keeping workers who performed poorly in the past to give them an ex-ante incentive to perform. Different firms choose to correlate the outcome of their randomization to reduce the probability with which they fire non-performing workers. Correlated randomization leads to aggregate fluctuations. Aggregate fluctuations are endogenous—they emerge because firms choose to randomize and they choose to randomize in a correlated fashion—and they are stochastic—they are the manifestation of a randomization process. The hallmark of a theory of endogenous and stochastic fluctuations is that the stochastic process for aggregate “shocks” is an equilibrium object.
“Evidence on the Relationship between Recruiting and Starting Wage,” with Jason Faberman, Labour Economics, 2018, 50 (1), 67-79.
Using data from the Employment Opportunity Pilot Project, we examine the relationship between the starting wage paid to the worker filling a vacancy, the number of applications attracted by the vacancy, the number of candidates interviewed for the vacancy, and the duration of the vacancy. We find that the wage is positively related to the duration of a vacancy and negatively related to the number of applications and interviews per week. We show that these surprising findings are consistent with a view of the labor market in which firms post wages and workers direct their search based on these wages if workers and jobs are heterogeneous and the interaction between worker’s type and job’s type in production satisfies some rather natural assumptions.
“Shopping Externalities and Self-Fulfilling Unemployment Fluctuations,” with Greg Kaplan, Journal of Political Economy, 2016, 124 (3), 771-825.
We propose a novel theory of self-fulfilling unemployment fluctuations. When a firm increases its workforce, it increases the demand facing other firms—as employed workers spend more than unemployed workers—and decreases the extent of competition facing other firms—as employed workers have less time to search for low prices than unemployed workers. In turn, the increase in demand and the decline in competition induces other firms to hire more labor in order to scale-up their presence in the product market. The feedback between employment and product market conditions generates multiple equilibria—and the possibility of self-fulfilling fluctuations—if the differences in the shopping behavior of employed and unemployed workers are large enough. Empirical evidence on spending, shopping and prices paid suggests that this is the case.
“Directed Search over the Life Cycle,” with Irina Telyukova and Ludo Visschers, Review of Economic Dynamics, 2016, 19 (1), 38-62.
We develop a life-cycle model of the labor market in which different worker-firm matches have different quality and the assignment of the right workers to the right firms is time consuming because of search and learning frictions. The rate at which workers move between unemployment, employment and across different firms is endogenous because search is directed and, hence, workers can choose whether to seek low-wage jobs that are easy to find or high-wage jobs that are hard to find. We calibrate our theory using data on labor market transitions aggregated across workers of different ages. We validate our theory by showing that it correctly predicts the pattern of labor market transitions for workers of different ages. Finally, we use our theory to decompose the age profiles of transition rates, wages and productivity into the effect of age variation in work-life expectancy, human capital and match quality.
“Taxation and Redistribution of Residual Income Inequality,” with Mikhail Golosov and Pricila Maziero, Journal of Political Economy, 2013, 121 (6), 1160-1204.
This paper studies the optimal redistribution of income inequality caused by the presence of search and matching frictions in the labor market. We study this problem in the context of a directed search model of the labor market populated by homogenous workers and heterogeneous firms. The optimal redistribution can be attained using a positive unemployment benefit and an increasing and regressive labor income tax. The positive unemployment benefit serves the purpose of lowering the search risk faced by workers. The increasing and regressive labor tax serves the purpose of aligning the cost to the firm of attracting an additional applicant with the value of an application to society.
“Efficient Search on the Job and the Business Cycle,” with Shouyong Shi, Journal of Political Economy, 2011, 119 (3), 468-510.
The paper develops a model of directed search on the job where transitions of workers between unemployment, employment and across employers are driven by heterogeneity in the quality of firm-worker matches. The equilibrium is such that the agents’ value and policy functions are independent of the distribution of workers across employment states. Hence, the model can be solved outside of steady-state and used to measure the effect of cyclical productivity shocks on the labor market. Productivity shocks are found to generate large fluctuations in workers’ transitions, unemployment and vacancies when matches are experience good, but not when matches are inspection goods.
“Inflation and Unemployment in the Long Run,” with Aleksander Berentsen and Randall Wright, American Economic Review, 2011, 101 (1), 371-398.
We study the long-run relation between money (inflation or interest rates) and unemployment. We document positive relationships between these variables at low frequencies. We develop a framework where money and unemployment are modeled using explicit microfoundations, providing a unified theory to analyze labor and goods markets. We calibrate the model and ask how monetary factors account for labor market behavior. We can account for a sizable fraction of the increase in unemployment rates during the 1970s. We show how it matters whether one uses monetary theory based on the search-and-bargaining approach or on an ad hoc cash-in-advance constraint.
“Worker Replacement,” with Espen Moen, Journal of Monetary Economics, 2010, 57 (6), 623-636 (Lead article).
Consider a labor market in which firms want to insure existing employees against income fluctuations and, simultaneously, want to recruit new employees to fill vacant jobs. Firms can commit to a wage policy, i.e. a policy that specifies the wage paid to their employees as a function of tenure, productivity and other observables. However, firms cannot commit to employ workers. In this environment, the optimal wage policy prescribes not only a rigid wage for senior workers, but also a downward rigid wage for new hires. The downward rigidity in the hiring wage magnifies the response of unemployment to negative shocks.
“Directed Search on the Job, Heterogeneity and Aggregate Fluctuations,” with Shouyong Shi, American Economic Review, 2010, 100 (2), 327-332.
In this paper, we prove the existence of a Block Recursive Equilibrium for a model of directed search on the job in which workers are ex-ante heterogeneous with respect to some observable characteristic such as education.
“Block Recursive Equilibria for Stochastic Models of Search on the Job,” with Shouyong Shi, Journal of Economic Theory, 2010, 145 (4), 1453-1494.
We develop a general stochastic model of directed search on the job. Directed search allows us to focus on a Block Recursive Equilibrium (BRE) where agents’ value functions, policy functions and market tightness do not depend on the distribution of workers over wages and unemployment. We formally prove existence of a BRE under various specifications of workers’ preferences and contractual environments, including dynamic contracts and fixed-wage contracts. Solving a BRE is as easy as solving a representative agent model, in contrast to the analytical and computational difficulties in models of random search on the job.
“High-Frequency Wage Rigidity,” Job Market Paper (2005).
In the context of a frictional model of the labor market with off and on the job search, I advance a novel model of wage determination where contracts are non-binding and firms have private information about the productivity of labor. The characterization of the intra-firm bargaining game leads to a reduced-form model where the firm chooses the wage subject to a non-discrimination and consistency constraints. The fundamental property of the optimal firm-wage policy is high-frequency wage rigidity. While the firm does not respond to productivity shocks whose persistence falls below a critical threshold, the wage is a non-degenerate function of the long-term component of labor productivity. A calibrated version of the model shows that the cyclical behavior of the model is quantitatively consistent with the empirical regularities of the labor market at the business cycle frequency. Among other things, wages are nearly acyclical, the semi-elasticity of the average labor productivity to unemployment is smaller than one, and vacancies are almost perfectly correlated with unemployment.