constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks we investigate the welfare properties of the one sector neoclassical growth model with uninsurable idiosyncratic shocks we focus on the notion of constrained efficiency used in the general equilibrium literature our characterization of constrained efficiency uses the first order condition of a constrained planner s problem this condition highlights the margins of relevance for whether capital is too high or too low the factor composition of income of the consumption poor using three calibrations commonly considered in the literature we illustrate that there can be either over or underaccumulation of capital in steady state and that the constrained optimum may or may not be consistent with a nondegenerate long run distribution of wealth for the calibration that roughly matches the income and wealth distribution the constrained inefficiency of the market outcome is rather striking it has much too low a steady state capital stock

job displacement risk and severance pay abstract this paper is a quantitative equilibrium study of the insurance role of severance pay when workers face displacement risk and markets are incomplete a key feature of our model is that in line with an established empirical literature job displacement entails a persistent fall in earnings upon re employment due to the loss of tenure the model is solved numerically and calibrated to the us economy in contrast to previous studies that have analyzed severance payments in the absence of persistent earning losses we find that the welfare gains from the insurance against job displacement afforded by severance pay are sizable

wealth distribution in life cycle economies abstract this paper compares the age wealth distribution produced in life cycle economies to the corresponding distribution in the us economy the idea is to calibrate the model economies to match features of the us earnings distribution and then examine the wealth distribution implications of the model economies the findings are that the calibrated model economies with earnings and lifetime uncertainty can replicate measures of both aggregate wealth and transfer wealth in the us furthermore the model economies produce the us wealth gini and a significant fraction of the wealth inequality within age groups however the model economies produce less than half the fraction of wealth held by the top 1 percent of us households

costs of business cycles for unskilled workers abstract unskilled workers are subject to a much larger risk of unemployment during recessions than are skilled workers moreover unskilled workers earn less income which limits their ability to self insure we examine how this heterogeneity in unemployment risk and income across different skill groups translates into heterogeneity in the cost of business cycles we find that the welfare cost of business cycles for unskilled workers is substantially higher than the welfare cost for skilled workers

welfare cost of fluctuations when labor market search interacts with financial frictions we provide a quantitative assessment of welfare costs of fluctuations in a search model with financial frictions the matching process in the labor market leads positive shocks to reduce unemployment less than negative shocks increase it we show that the magnitude of this non linearity is magnified frictions this asymmetric effect of the business cycle leads to sizable welfare costs the model also accounts for the responsiveness of the job finding rate to the business cycle as financial frictions endogenously generate counter cyclical opportunity costs of opening a vacancy and wage sluggishness

job destruction and propagation of shocks this paper considers propagation of aggregate shocks in a dynamic general equilibrium model with labor market matching and endogenous job destruction cyclical fluctuations in the job destruction rate magnify the output effects of shocks as well as making them much more persistent interactions between capital adjustment and the job destruction rate play an important role in generating persistence propagation effects are shown to be quantitatively substantial when the model is calibrated using job flow data incorporating costly capital adjustment leads to significantly greater propagation

precautionary saving over the business cycle we study the macroeconomic implications of time varying precautionary savings within a general equilibrium model with borrowing constraints aggregate shocks and uninsurable idiosyncratic unemployment risk our framework generates limited cross sectional household heterogeneity as an equilibrium outcome thereby making it possible to analyse the role of precautionary saving over the business cycle in an analytically tractable way the time series behaviour of aggregate consumption generated by our model is closer to the data than that implied by the hand to mouth and representative agent models and it is comparable to that produced by the krusell and smith 1998 model

the macro effects of unemployment benefit extensions a measurement error approach by how much does an extension of unemployment benefits affect macroeconomic outcomes such as unemployment answering this question is challenging because u s law extends benefits for states experiencing high unemployment we use data revisions to decompose the variation in the duration of benefits into the part coming from actual differences in economic conditions and the part coming from measurement error in the real time data used to determine benefit extensions using only the variation coming from measurement error we find that benefit extensions have a limited influence on state level macroeconomic outcomes we apply our estimates to the increase in the duration of benefits during the great recession and find that they increased the unemployment rate by at most 0 3 percentage point

on the future of macroeconomics a new monetarist perspective this article argues that a pressing goal for macroeconomics is to incorporate financial considerations but we need models with solid microfoundations in particular the use of assets in facilitating exchange as well as different credit or other financial arrangements should be outcomes of not inputs to theories as a preview i suggest that mainstream macro does a good job explaining many phenomena and a financial crisis does not disprove such theory but understanding crises requires better incorporating factors related to money credit banking and liquidity the approach called new monetarist economics can help a lot in this regard

unemployment insurance and unemployment accounts the best of both worlds unemployment accounts are mandatory individual savings accounts that can be used only during unemployment or retirement unlike unemployment insurance unemployment accounts solve the moral hazard problem but provide no public insurance to workers i study a hybrid system that borrows from concepts of both unemployment insurance and unemployment accounts in which workers are mandated to save when employed and can withdraw from the account when unemployed once the account is exhausted the unemployed worker receives unemployment benefits this hybrid policy provides insurance to workers more efficiently than an unemployment insurance system because it provides government benefits selectively as a consequence young workers can reduce their precautionary savings and better smooth their consumption over the life cycle calibrating the model to the us economy i find that relative to an optimal unemployment insurance system the optimal hybrid policy leads to a welfare gain of 2 4 measured as consumption equivalent variation jel classification e24 e61 j64 j65

redistributive shocks and productivity shocks abstract a productivity innovation reduces labor share at impact making it countercyclical it subsequently produces a long lasting increase that peaks five years later at a level larger in absolute terms than the initial drop before slowly returning to average i e labor share overshoots we estimate a bivariate shock process to the production function that under competition in factor markets accounts for this overshooting we pose this process in an otherwise standard real business cycle economy and we find that the contribution of productivity innovations to the variance of hours is 1 of that in the standard rbc model

good jobs versus bad jobs this article develops a model of noncompetitive labor markets in which high wage good and low wage bad jobs coexist minimum wages and unemployment benefits shift the composition of employment toward high wage jobs because the composition of jobs in the laissez faire equilibrium is inefficiently biased toward low wage jobs these labor market regulations increase average labor productivity and may improve welfare

labor market matching with precautionary savings and aggregate fluctuations we analyze a bewley huggett aiyagari incomplete markets model with labor market frictions consumers are subject to idiosyncratic employment shocks against which they cannot insure directly the labor market has a diamond mortensen pissarides structure firms enter by posting vacancies and match with workers bilaterally with match probabilities given by an aggregate matching function wages are determined through nash bargaining we also consider aggregate productivity shocks and a complete set of contingent claims conditional on this risk we use the model to evaluate a tax financed unemployment insurance scheme higher insurance is beneficial for consumption smoothing but because it raises workers outside option value it discourages firm entry we find that the latter effect is more potent for welfare outcomes we tabulate the effects quantitatively for different kinds of consumers we also demonstrate that productivity changes in the model in steady state as well as stochastic ones generate rather limited unemployment effects unless workers are close to indifferent between working and not working thus recent findings are corroborated in our more general setting

globalization and its challenges rudi was born and grew up in krefeld germany he was an undergraduate at the university of geneva and completed his ph d at the university of chicago in 1971 which is where we met he was a student of robert mundell and both the subject matter the development of the mundell fleming model and the elegance and insights of his early work reflected mundell s influence he taught at the university of rochester and at the university of chicago before accepting an offer from mit in 1975

business cycles in the equilibrium model of labor market search and self insurance i introduce risk aversion labor leisure choice capital individual productivity shocks and market incompleteness to the standard model of labor search and matching and investigate the model s cyclical properties i find that the model can generate the observed large volatility of unemployment and vacancies with a reasonable replacement rate of unemployment insurance benefits of 64 labor leisure choice plays a crucial role through additional utility from leisure when unemployed and further amplification from adjustments of hours worked on the other hand the borrowing constraint or individual productivity shocks do not significantly affect the cyclical properties of unemployment and vacancies

productivity gains from unemployment insurance this paper argues that unemployment insurance increases labor productivity by encouraging workers to seek higher productivity jobs and by encouraging rms to create those jobs we use a quantitative model to investigate whether this eect is comparable in magnitude to the standard moral hazard eects of unemployment insurance our model economy captures the behavior of the u s labor market for high school graduates quite well with unemployment insurance more generous than the current u s level unemployment would increase by a magnitude similar to the micro estimates but because the composition of jobs also changes total output and welfare would increase as well

frictional wage dispersion in search models a quantitative assessment we propose a new measure of frictional wage dispersion the mean min wage ratio for a large class of search models we show that this measure is independent of the wage offer distribution but depends on statistics of labor market turnover and on preferences under plausible preference parameterizations observed magnitudes for worker flows imply that in the basic search model and in most of its extensions frictional wage dispersion is very small notable exceptions are some of the most recent models of on the job search our new measure allows us to rationalize the diverse empirical findings in the large literature estimating structural search models

debt constraints and employment during the great recession us regions that experienced large declines in household debt also experienced large drops in consumption employment and wages we develop a search and matching model i

household search and the aggregate labor market we develop a theoretical model with labour market frictions incomplete financial markets and with households which have two members households face unemployment risks but their members adjust their labour supplies to insure against unemployment we use the model to explain the cyclical properties of aggregate employment and participation as in the u s data the model predicts that the participation rate the fraction of individuals that want jobs is not strongly correlated with aggregate economic activity this property is in sharp contrast to the strongly procyclical participation predicted by both neoclassical models and models with search frictions when we assume bachelor households or households with infinitely many members complete markets in the two member household model and in the data primary earners are always in the labour force secondary earners have a mildly countercyclical participation rate and a mildly procyclical employment rate their behaviour insures the household against unemployment risks

human capital and unemployment dynamics why more educated workers enjoy greater employment stability why do more educated workers experience lower unemployment rates and lower employment volatility empirically these workers have similar job finding rates but much lower and less volatile separation rates than their less educated peers we argue that on the job training being complementary to formal education is the reason for this pattern using a search and matching model with endogenous separations we show that investments in match specific human capital reduce incentives to separate but leave the job finding rate essentially unaffected the model generates unemployment dynamics quantitatively consistent with the data finally we provide novel empirical evidence supporting the mechanism studied in the paper this article is protected by copyright all rights reserved

how important is intra household risk sharing for savings and labor supply abstract while it is recognized that the family is a risk sharing institution little is known about the quantitative effects of this source of insurance on savings and labor supply in this paper we present a model where workers females and males are subject to idiosyncratic employment risk and where capital markets are incomplete a household is formed by a female and a male who decide on consumption savings and labor supplies in a calibrated version of our model we find that intra household risk sharing has its largest impact among wealth poor households while the wealth rich use mainly savings to smooth consumption across unemployment spells wealth poor households rely on spousal labor supply for instance for low wealth households average hours worked by wives of unemployed husbands are 8 higher than those worked by wives of employed husbands this response in wives hours makes up 9 of lost family income we also study consumption losses upon an unemployment spell precautionary savings and the crowding out effects of the public unemployment insurance program on the extent of risk sharing within the household

the role of unemployment insurance in an economy with liquidity constraints and moral hazard the potential welfare benefits of unemployment insurance along with the optimal replacement ratio are studied using a quantitative dynamic general equilibrium model to provide a role for unemployment insurance agents in our economy face exogenous idiosyncratic employment shocks and are unable to borrow or insure themselves through private markets in the absence of moral hazard replacement ratios as high as 65 are optimal and the welfare benefits of unemployment insurance are quite large however if there is moral hazard and the replacement ratio is not set optimally but is instead set to an empirically plausible value the economy can be much worse off than it would be without unemployment insurance

unemployment fears and deflationary spirals the interaction of incomplete markets and sticky nominal wages is shown to magnify business cycles even though these two features in isolation dampen them during recessions fears of unemployment stir up precautionary sentiments which induces agents to save more the additional savings may be used as investments in both a productive asset equity and an unproductive asset money but even a small rise in money demand has important consequences the desire to hold money puts deflationary pressure on the economy which provided that nominal wages are sticky increases wage costs and reduces firm profits lower profits repress the desire to save in equity which increases the fear of unemployment and so on this is a powerful mechanism which causes the model to behave differently from both its complete markets version and a version with incomplete markets but without aggregate uncertainty in contrast to previous results in the literature agents uniformly prefer non trivial levels of unemployment insurance

the adverse effect of unemployment insurance on workers on the job effort and labor market outcomes i investigate the effect of unemployment insurance on worker on the job effort and its macroeconomic impacts the results show that a moderate increase in unemployment benefits decreases the average wage and employment duration and aggregate output and increases average layoff rate

labor market dynamics under long term wage contracting abstract recent research seeking to explain the strong cyclicality of us unemployment emphasizes the role of wage rigidity this paper proposes a micro founded model of wage rigidity an equilibrium business cycle model of job search where risk neutral firms post optimal long term contracts to attract risk averse workers equilibrium contracts feature wage smoothing limited by the inability of parties to commit to contracts the model is consistent with aggregate wage data if neither worker nor firm can commit producing too rigid wages otherwise wage rigidity does not lead to a substantial increase in the cyclical volatility of unemployment

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

shareholders unanimity with incomplete markets macroeconomic models with heterogeneous agents and incomplete markets e g krusell and smith 1998 usually assume that consumers rather than rms own and accumulate physical capital this assumption while convenient is without loss of generality only if the asset market is complete when nancial markets are incomplete shareholders will in general disagree on the optimal level of investment to be undertaken by the rm this paper derives conditions under which shareholders unanimity obtains in equilibrium despite the incompleteness of the asset market in the general equilibrium economy analyzed here consumers face idiosyncratic labor income risk and trade rms shares in the stock market a rm s shareholders decide how much of its earnings to invest in physical capital and how much to distribute as dividends the return on a rm s capital investment is affected by an aggregate productivity shock the paper contains two main results first if the production function exhibits constant returns to scale and short sales constraints are not binding then in a competitive equilibrium a rm s shareholders will unanimously agree on the optimal level of investment thus the allocation of resources in this economy is the same as in an economy where consumers accumulate physical capital directly second when short sales constraints are binding instead the unanimity result breaks down in this case constrained shareholders prefer a higher level of investment than unconstrained ones

long term evolution of productivity in a sample of philippine rice farms implications for sustainability and future research abstract we investigate long term productivity trends in a representative intensive rice cropping system using periodic farm level survey data spanning more than 20 years of the green revolution in two rice bowls of the philippines estimation of production functions with year dummy variables shows substantial declines in productivity from the early 1980s to the mid 1990s examination of secondary data shows however that the survey years were unrepresentative of long term trends and were unduly influenced by exogenous yield shocks correction for these effects removes the productivity decline but shows that productivity has stagnated a renewed emphasis on increasing crop genetic yield potential may be necessary in order to improve productivity and restore the contribution of this important farming system to poverty alleviation

short term pain for long term gain market deregulation and monetary policy in small open economies abstract this paper explores the effects of labor and product market reforms in a new keynesian small open economy model with labor market frictions and endogenous producer entry we show that it takes time for reforms to pay off typically at least a couple of years this is partly because the benefits materialize through firm entry and increased hiring both of which are gradual processes while any reform driven layoffs are immediate some reforms such as reductions in employment protection increase unemployment temporarily implementing a broad package of labor and product market reforms minimizes transition costs importantly reforms do not have noticeable deflationary effects suggesting that the inability of monetary policy to deliver large interest rate cuts in their aftermath either because of the zero bound on policy rates or because of the membership in a monetary union may not be a relevant obstacle to reform alternative simple monetary policy rules do not have a large effect on transition costs

the redistributive roles of unemployment insurance and the dynamics of voting abstract public unemployment insurance is analyzed as the majority voting equilibrium policy of a dynamic stochastic economy abstracting from incentive effects we focus on redistribution some results are because of the distribution of heterogeneous employment opportunities public insurance may be democratically chosen even if complete private markets exist and because of the dynamics even when agents are intrinsically homogeneous the equilibrium benefit level or duration benefit schedule deviates from what has been described as optimal in the literature the effects of differences in the average frequency or duration of unemployment on equilibrium taxes and benefits are investigated with some unanticipated results

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

aggregate implications of indivisible labor incomplete markets and labor market frictions this paper analyzes a model that features frictions an operative labor supply margin and incomplete markets we flrst provide analytic solutions to a benchmark model that includes indivisible labor and incomplete markets in the absence of trading frictions we show that the steady state levels of aggregate hours and aggregate capital stock are identical to those obtained in the economy with employment lotteries while individual employment and asset dynamics can be difierent second we introduce labor market frictions to the benchmark model we flnd that the efiect of the frictions on the response of aggregate hours to a permanent tax change is highly non linear we also flnd that there is considerable scope for substitution between voluntary and frictional nonemployment in some situations

optimal unemployment insurance with heterogeneous agents the framework of a general equilibrium heterogeneous agent model is used to study the optimal design of an unemployment insurance ui scheme and preferences for unemployment policy reforms in a first step the optimal defined benefit and defined replacement ratio ui systems are obtained in simulations then the question whether switching to such an optimal system from the status quo would be approved by a majority of the population is explored finally the transitional dynamics following a policy change are analysed accounting for this transition has an important influence on the support for a policy change

cost of business cycles with indivisibilities and liquidity constraints it is almost universally agreed that individuals face incomplete insurance markets and cannot perfectly insure against the idiosyncratic risk in this paper simple general equilibrium models with incomplete insurance markets are examined in order to assess the impact of imperfect insurance on the magnitude of the welfare costs of business cycles two versions of incomplete insurance markets are considered and certain statistical properties of the equilibrium stochastic processes in these environments are compared with those of a perfect insurance economy

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

mobility costs frictional unemployment and efficiency with imperfect job information flows it is plausible that the distribution of job offerings becomes more attractive when there are more vacancies and more unemployed with word of mouth communication this condition is derived given this condition steady state equilibrium is not efficient with welfare increased by the introduction of unemployment compensation even though all agents are risk neutral in this way workers become more selective in the jobs they accept

the redistributive role of unemployment benefits abstract this paper evaluates the role of unemployment benefits as a tool for redistribution in a setting with worker heterogeneity the provision of unemployment benefits achieves two goals it provides insurance to workers in the event of job loss and it redistributes wealth from individuals with more to those with fewer economic opportunities our model features a frictional labour market and an incomplete financial market when calibrated to match stylised facts of the us economy the optimal level of unemployment benefits is broadly similar regardless of whether workers differ in economic opportunities this suggests that taking into consideration the redistributive nature of unemployment benefits has only a limited role in altering the optimal level of unemployment benefits

application of the dea on the measurement of efficiency in the eu countries the purpose of the paper is to investigate the relative technical efficiency of the agricultural sector in the european union eu using the data envelopment analysis dea during the period 2007 2011 the authors investigated efficiency using both the input and output oriented models with the assumption of a variable return to scale they looked for causes of inefficiency and made recommendations for inefficient agricultural sectors the results show that in average the eu agricultural sectors performed efficiently as evidenced by the relatively high value of the average input and output efficiency the efficiency of the eu agricultural sectors had changed over the past few years and in both models the efficiency has generally decreased over time as the main source of inefficiency was labelled the input total utilised agricultural area and as the strength with a positive impact on efficiency there was labelled the crop output by calculating the optimal values for the input and output variables for inefficient agricultural sectors it has been found that for the efficient production of a given quantity of outputs it was necessary to reduce the value of the in put total labour in average by 6 18 the total utilised agricultural area in average by 14 45 and the total assets in average by 5 93 in case of the output oriented model for efficient use of a given quantity of inputs the agricultural sectors should produce up to 111 85 of their crop output and 113 41 of their animal output

optimal unemployment insurance in ge a robust calibration approach abstract a simple monte carlo calibration approach is implemented in a ge model with uninsurable employment risk to quantitatively study the optimal replacement rate of a public unemployment insurance ui scheme the optimal ui sampling distribution is found to be bimodal

wages and the value of nonemployment nonemployment is often posited as a worker s outside option in wage setting models such as bargaining and wage posting the value of nonemployment is therefore a key determinant of wages we measure the wage effect of changes in the value of nonemployment among initially employed workers our quasi experimental variation in the value of nonemployment arises from four large reforms of unemployment insurance ui benefit levels in austria we document that wages are insensitive to ui benefit changes point estimates imply a wage response of less than 0 01 per 1 00 ui benefit increase and we can reject sensitivities larger than 0 03 the insensitivity holds even among workers with low wages and high predicted unemployment duration and among job switchers and recently unemployed workers the insensitivity of wages to the nonemployment value presents a puzzle to the widely used nash bargaining model which predicts a sensitivity of 0 24 0 48 our evidence supports wage setting models that insulate wages from the value of nonemployment

on the job search and precautionary savings in this paper i develop and estimate a model of on the job search in which risk averse workers choose search effort and can borrow or save using a single risk free asset i derive the implications for optimal savings behavior in this environment and relate this to the frictions that characterize the endogenous earnings process implied by on the job search savings behavior depends in a very intuitive way on the rate at which offers are received the rate at which jobs are destroyed and a worker s current rank in the wage distribution the implication is that workers who are identical in terms of preferences and opportunities have substantially different savings behavior depending on their history and current position in the wage distribution the mechanism that generates the substantial differences in savings behavior in the model is the dynamic of the wage ladder resulting from the search process there is an important asymmetry between the incremental wage increases generated by onthe job search climbing the ladder and the drop in income associated with job loss falling off the ladder the behavior of workers in low paying jobs is primarily governed by the expectation of wage growth while the behavior of workers near the top of the distribution is driven by the possibility of job loss the distributions of earnings wealth and consumption implied by the model suitably aggregated align reasonably well with the data with the notable exception of implying substantially less concentration of wealth among the richest one percent of the population in this paper i develop and estimate a model of on the job search in which risk averse workers choose search effort and can borrow or save using a single risk free asset i derive the implications for optimal savings behavior in this environment and relate this to the frictions that characterize the endogenous earnings process implied by on the job search savings behavior depends in a very intuitive way on the rate at which offers are received the rate at which jobs are destroyed and a worker s current rank in the wage distribution the implication is that workers at different point in the wage distribution have substantially different savings behavior resulting in wealth dispersion that is much greater than earnings dispersion the mechanism that generates the high degree of wealth dispersion in the model is the dynamic of the wage ladder resulting from the search process there is an important asymmetry between the incremental wage increases generated by on the job search climbing the ladder and the drop in income associated with job loss falling off the ladder this feature of the model generates differential savings behavior at different points in the earnings distribution the behavior of workers in low paying jobs is primarily governed by the expectation of wage growth while the behavior of workers near the top of the distribution is primarily driven by the possibility of job loss the wage growth expected by low wage workers combined with the fact that their earnings are not much higher than unemployment benefits causes them to dissave as a worker s wage increases the incentive to save increases the potential for wage growth declines and it becomes increasingly important to insure against the large income reduction associated with job loss the fact that high wage and low wage workers have such different savings behavior leads to a wealth distribution that is much more unequal 1