the labour market over the business cycle can theory fit the facts we examine the ability of six labour market models to account for the business cycle behaviour of uk labour markets when embedded in a stochastic growth model we assess the models in terms of i their ability to mimic general business cycle correlations and volatility ii their success at explaining the persistence of labour market fluctuations and iii whether the models can explain why the growth and speed of adjustment of labour market variables changes between periods of expansions and contractions the main success of the models is the ability to broadly account for business cycle correlations and co movements and the changes in employment unemployment growth rates between expansions and contractions however there are three main failures a the models tend to produce insufficiently volatile employment and unemployment fluctuations b the models tend to produce too strong a correlation between wages and employment c most of the models generate only brief temporary deviations in unemployment in response to shocks rather than the protracted dynamics of the data

generating real persistent effects of monetary shocks how much nominal rigidity do we really need abstract this paper attempts to assess whether money can generate persistent economic fluctuations in dynamic general equilibrium models of the business cycle we show that a small nominal friction in the goods market can make the response of output to monetary shocks large and persistent if it is amplified by real wage rigidity in the labor market we also argue that for plausible levels of real wage rigidity a small degree of nominal stickiness is sufficient for money to produce economic fluctuations as persistent as those observed in the data

labor market search and real business cycles nash bargaining vs fair wage abstract this paper modifies the standard labor market search model with nash bargaining for a wage determination scheme which relies on efficiency wage theories more precisely the equilibrium wage rests on the gift exchange motivation it is shown that the combination of search frictions and fair wage hypothesis allows a business cycle model to replicate the dunlop tarshis observation without requiring a second source of impulses

the ir relevance of real wage rigidity in the new keynesian model with search frictions we explore the role of real wage dynamics in a new keynesian business cycle model with search and matching frictions in the labor market both job creation and destruction are endogenous we show that the model generates counterfactual inflation and labor market dynamics in particular it fails to generate a beveridge curve vacancies and unemployment are positively correlated introducing real wage rigidity leads to a negative correlation and increases the magnitude of labor market flows to more realistic values however inflation dynamics are only weakly affected by real wage rigidity this is because of the presence of labor market frictions which generate long run employment relationships the measure of real marginal cost that is relevant for inflation dynamics via the phillips curve contains a dynamic component that does not necessarily move with real wages

efficiency wages and economic growth abstract this paper examines the positive and normative implications of introducing efficiency wages into a standard growth model a number of useful findings are obtained under the empirically justifiable assumption that the elasticity of substitution between capital and labor is less than unity it is shown that an increase in thrift shifts downward the whole path of equilibrium unemployment to leave it permanently lower in the new steady state a level increase in the measure of as well as an increase in the rate of harrod neutral technical progress are contractionary for equilibrium employment the market economy underinvests

real business cycles and labor markets with imperfectly flexible wages abstract one of the principal criticisms of real business cycle models is that the assumptions made about labor markets do not accord with the actual structure of these markets this paper replaces the standard spot labor market with a market characterized by imperfectly flexible wages which corresponds to impressions of contractual labor relations it is found that the behavior of the model in terms of the predicted variances and correlations is similar to that of the standard real business cycle model but that the variability of hours worked and the correlation of hours worked with wages will depend on the structure of the labor market

efficiency wages and the business cycle puzzle abstract the main thrust of this work is to open the real business cycle rbc methodology to non walrasian considerations and reciprocally to submit some non walrasian models to the discipline of the rbc approach in doing so we provide a first rbc model with involuntary unemployment and a suboptimal equilibrium path we also demonstrate the promise and difficulty of resolving the business cycle puzzle by appealing to quantity rationing in the labor market

money new keynesian macroeconomics and the business cycle abstract we show in this paper that the typical modern business cycle cannot be reduced to the real business cycles archetype a monopolistic competition model with price adjustment costs affected by technological and monetary shocks better mimics the economic fluctuations in two countries with very different cyclical properties namely france and the united states in our model monetary shocks are necessary to reproduce the standard deviation of output the money output correlation the labour productivity worked hours relative standard deviation the labour productivity worked hours correlation and the mark up output correlation with two independent shocks one real more specifically defined than the solow residual and one nominal the model gives an answer to some empirical puzzles which were left unexplained by traditional rbc models

nobel lecture the transformation of macroeconomic policy and research what i am going to describe for you is a revolution in macroeconomics a transformation in methodology that has reshaped how we conduct our science prior to the transformation macroeconomics was largely separate from the rest of economics indeed some considered the study of macroeconomics fundamentally different and thought there was no hope of integrating macroeconomics with the rest of economics that is with neoclassical economics others held the view that neoclassical foundations for the empirically determined macro relations would in time be developed neither view proved correct finn kydland and i have been lucky to be a part of this revolution and my address will focus heavily on our role in advancing this transformation now all stories about transformation have three essential parts the time prior to the key change the transformative era and the new period that has been affected by the change and that is the story i am going to tell how macroeconomic policy and research changed as a result of the transformation of macroeconomics from constructing a system of equations of the national accounts to an investigation of dynamic stochastic model economies

a bayesian evaluation of an efficiency wage model with indeterminacy this paper provides a quantitative assessment of a general equilibrium economy with non walrasian labour markets indeterminacy in the economy does not require production externalities or increasin

labor market dynamics with search frictions and fair wage considerations fairness considerations in wage setting can improve the ability of the diamond mortensen pissarides search and matching model to account for u s labor market dynamics firms production is influenced by workers effort input which depends on whether workers consider the employment relation as fair a typical worker s effort is determined in a comparison of individual current wage with wage norms including the outside option the individual past wage and the wage level in the steady state the fairness considerations in the search framework give rise to endogenous real wage rigidity and realistic volatilities of unemployment vacancies and labor market tightness jel e24 e32 j64

business cycles in switzerland a comparative study abstract the goal of this paper is to provide an empirical description of business cycles in switzerland and a comparison with business cycles in other countries we adopt a view of business cycles as a set of regularities in the movements and the co movements of economic aggregates common to all decentralized economies lucas 1977 and test whether switzerland conforms to this view in order to identify the appropriate cyclical series we follow a procedure proposed by hodrick and prescott 1980 we then compute correlations of various types we test their stability through time and compare with corresponding estimates for the u s france germany and the u k

growth and unemployment in a shirking efficiency wage model the relationship between growth and unemployment in a general equilibrium shirking efficiency wage model is explored in contrast to past work on this subject detected shirkers are not dismissed but instead incur a monetary punishment as a result of this modification the model can account for a stable rate of unemployment when there is positive population growth and or technological growth in the economy moreover i show that institutions and policies that limit the ability of firms to punish detected shirkers or restrict their use of discretionary bonuses can increase unemployment and reduce the economy s long run growth rate jel classification e0 j41 croissance et chomage dans un modele de salaires efficients ou certains se derobent a leurs obligations ce memoire explore la relation entre croissance et chomage dans un modele d equilibre general de salaires efficients ou certains se derobent a leurs obligations contrairement a ce qui postule dans certains travaux anterieurs sur le sujet les tricheurs detectes ne sont pas renvoyes mais subissent une penalite monetaire gr ce a cette modification le present modele est capable d expliquer un taux de chomage naturel stable meme quand il y a croissance de la population et ou progres de la technologie dans l economie de plus les resultats suggerent que les institutions et politiques qui limitent la possibilite pour les entreprises de punir les tricheurs ou reduisent la possibilite d offrir des bonis discretionnaires peuvent accroitre le niveau de chomage d equilibre et reduire le taux de croissance a long terme de l economie

the most beautiful variations on fair wages and the phillips curve this paper explores the connection between inflation and unemployment in two different models with fair wages in both the short and the long runs under customary assumptions regarding the sign of the parameters of the effort function more inflation lowers the unemployment rate albeit to a declining extent this is because firms respond to inflation which spurs effort by decreasing the reference wage by increasing employment thus maintaining the effort level constant as implied by the solow condition a stronger short run effect of inflation on unemployment is produced under varying as opposed to fixed capital given that in the former case the boom produced by a monetary expansion is reinforced by an increase in investment therefore i provide a new theoretical foundation for recent empirical contributions that find negative long and short run effects of inflation on unemployment

labor turnover and the natural rate of unemployment efficiency wage vs frictional unemployment wage and unemployment responses to changes in economic environment are compared for efficiency wage and frictional models changes in aggregate demand persistence of job specific shocks cost of living and unemployment benefits are considered wages and unemployment move in the same direction in the two models except that an upward shift in aggregate labor demand can reduce the real wage in the efficiency wage but not the frictional model in a numerical simulation calibrated to u s data real productivity shocks in the efficiency wage model yield a ratio of unemployment to wage variability close to that of the united states

sticky prices fair wages and the co movements of unemployment and labor productivity growth abstract this paper studies the co movements of unemployment and labor productivity growth for the u s economy measures of co movements in the frequency domain indicate that co movements between variables differ strongly according to the frequency first long term and business cycle co movements are larger than short term co movements second co movements are negative in the short and long run but positive over the business cycle a new keynesian model that combines nominal rigidity on the goods market sticky prices and real rigidity on the labor market fair wages is shown to be quantitatively consistent with the observed co movements both in the long term and over the business cycle however the model fails to explain the short term co movements

indivisible labor and the business cycle abstract a growth model with shocks to technology is studied labor is indivisible so all variability in hours worked is due to fluctuations in the number employed we find that unlike previous equilibrium models of the business cycle this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity this finding is independent of individuals willingness to substitute leisure across time this and other findings are the result of studying and comparing summary statistics describing this economy an economy with divisible labor and post war u s time series

variable rate deposit insurance a re examination abstract this paper investigates the impact of variable rate deposit insurance on the financial and real sectors of the economy and its role as an absorber of bankruptcy risk within these sectors a variable rate system raises the cost of funds to the real sector and increases probability of bankruptcy of the borrowing firms when such bankruptcies occur society experiences a dead weight loss we argue that appropriate deposit insurance pricing must weigh the social costs connected with both financial firm failure and real sector bankruptcy

the equity premium and the allocation of income risk abstract this paper examines the extent to which the equity premium puzzle can be resolved by taking account of the fact that stockholders bear a disproportionate share of output uncertainty we do this in the context of a non walrasian rbc model where risk reallocation is justified by borrowing restrictions the risk shifting mechanism we propose has the same effect as would arise from an increase in the risk aversion parameter of the representative agent and thus contributes to a rise in the equity premium as with more standard rbc models it remains that our model is unable to replicate key financial statistics in particular the observation that the equity return is more variable than national product cannot be accounted for under standard technology assumptions

wage determination in agricultural labour markets under monopsonist labour tying arrangements there is need for a study of wage formation in agricultural labour markets which can simultaneously explain the existence of involuntary unemployment on the one hand and responsiveness to market forces on the other this paper offers an analysis and empirical study of wage determination in a typical rural agricultural setting and finds that based on the notion of efficiency wages a two tier situation explains why rural wage rates are known to vary widely among workers and across regions

employment fluctuations with downward wage rigidity the role of moral hazard we study the cyclical dynamics of job creation and destruction when workers effort is not perfectly observable the no shirking constraint may amplify fluctuations in hiring by making firms surplus share procyclical and may cause a burst of inefficient firing when a downturn begins but quantitatively it mainly raises the cost of motivating marginal workers in booms since firms cannot commit to keep them in recessions and thereby strongly damps the countercyclical fluctuations in the separation rate this implies a robust beveridge curve but casts doubt on ramey and watson s 1997 contractual fragility mechanism and worsens shimer s 2005a volatility puzzle

methodological and empirical issues in real business cycle theory abstract in this paper we argue that the major impact of the rbc literature has been to propose a new methodology for macroeconomics this methodology is distinguished first by the importance it attributes to the empirical description of the phenomena to be explained and second by the use of this description in conjunction with quantitative theorizing i e the construction of computable general equilibrium models whose characteristic statistics match those of the data in accordance with this approach we first report on the current state of knowledge concerning business cycle regularities and conclude that additional empirical effort is called for in order to arrive at the appropriate basis for theorizing we then examine the performance of existing models and evaluate the case for integrating monetary factors and demand shocks into them lastly we review the recent efforts to explain the employment variability puzzle and argue that the search for a solution naturally leads to the incorporation of significant non walrasian features into the rbc framework

incentives in competitive search equilibrium this paper proposes a labor market model with job search frictions where workers have private information on match quality and eort firms use wage contracts to motivate workers in addition wages are also used to attract employees we de ne and characterize competitive search equilibrium in this context and show that it satis es a simple modi ed hosios rule the model is used to address the shimer puzzle related to the low volatility of the unemployment rate relative to the volatility of output observed in the data we nd that private information may increase the responsiveness of the unemployment rate to changes in productivity and in particular to changes in

deregulation and bank financial policy the standard view that banks can value maximize by exploiting non risk rated deposit insurance ignores the potential loss of a valuable bank charter due to insolvency recognition of this effect changes the bank s optimal financial policy and can induce extreme risk averting as well as risk taking behavior however as the value of the bank charter falls the risk taking strategy is more apt to dominate therefore current deregulation of the banking industry by easing entry and devaluing charters holds the potential for increases in the incidence of insolvency unless offsetting policies are instituted

efficiency wages financial market integration and the fiscal multiplier abstract we used a new open economy macroeconomic model featuring a labor market friction in the form of efficiency wages to analyze the implications of financial market integration for the fiscal multiplier the fiscal multiplier measures the accumulated effect of fiscal policy on output conventional wisdom based on the basic textbook version of the classic mundell fleming model suggests that the fiscal multiplier should become smaller as financial markets become more integrated we show that a labor market friction in the form of efficiency wages implies that financial market integration should increase the fiscal multiplier

unemployment insurance in a sticky price model with worker moral hazard abstract this paper studies the role of unemployment insurance in a sticky price model that features an efficiency wage view of the labor market based on unobservable effort the risk sharing mechanism central to the model permits but does not force agents to be fully insured structural parameters are estimated using a maximum likelihood procedure on us data formal hypothesis tests reveal that the data favor a model in which agents only partially insure each other against employment risk the results also show that limited risk sharing helps the model capture many salient properties of the business cycle that a restricted version with full insurance fails to explain

deposit insurance pricing and social welfare abstract recent literature has established that financial disruption has real costs which justify government intervention in the financial sector one form of government intervention is deposit insurance in this paper we determine the optimal pricing and subsidy of deposit insurance in a social welfare context the main conclusion is that optimal deposit insurance need not be actuarially fair in an economy with a real and a financial sector we consider the effects of taxation and social political weights of the sectors we analyze two policy tools government supervision and deposit insurance pricing

efficiency wage models of unemployment keynesian economists hold it to be self evident that business cycles are characterized by involuntary unemployment but construction of a model of the cycle with involuntary unemployment faces the obvious difficulty of explaining why the labor market does not clear involuntarily unemployed people by definition want to work at less than the going wage rate why don t firms cut wages thereby increasing profits

a model of the natural rate of unemployment since the publication of edmund phelps volume the new macroeconomics has treated the labor market as a dynamic process of rational search by unemployed workers for available vacancies wages are viewed as at least potentially flexible though free contracting between workers and firms may lead to fixed wages in the short run imperfect information is a crucial element of the theory for it implies both a need for contracting and a need for rational search rather than simple market clearing in each period a positive rate of frictional unemployment may exist in equilibrium denoted as the natural rate this unemployment is due to the frictions in the search process and imperfections in information rather than to any deficiency in aggregate demand milton friedman defined the natural rate as the level that would be ground out by the walrasian system of general equilibrium equations provided there is embedded in them the actual structural characteristics of the labor and commodity markets including market imperfections stochastic variability in demands and supplies the cost of gathering information about job vacancies and labor availabilities the costs of mobility and so on p 8 this paper reexamines the micro foundations of the natural rate in a model of labor market equilibrium in which turnover flows and imperfect information are explicitly considered workers may quit their current jobs to enter the unemployment pool in order to search among available vacancies for a more preferred position firms economize on turnover by an appropriate wage policy

the computational experiment an econometric tool an economic experiment consists of the act of placing people in an environment desired by the experimenter who then records the time paths of their economic behavior performing experiments that use actual people at the level of national economies is obviously not practical but constructing a model economy and computing the economic behavior of the model s people is such experiments are termed computational this essay specifies the steps in designing a computational experiment to address some well posed quantitative question the authors emphasize that the computational experiment is an econometric tool used in the task of deriving the quantitative implications of theory

efficiency wages revisited the internal reference perspective the missing wage rigidity in general equilibrium models of e ciency wages is an artifact of the external wage reference perspective conventionally adopted by the literature e ciency wage models based on an internal perspective in which the wage reference is made dependent on the flrm s ability to pay are capable of generating strong wage rigidity this paper makes the point in the context of the gift exchange framework originally proposed by akerlof 1982 jel classiflcation e24 e32 j50

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances