Monopolistically Competitive Search Equilibrium (with Alan Finkelstein Shapiro).
This paper introduces a monopolistically-competitive recruiting (intermediated) market in a standard (non-intermediated) search and matching model to explore the implications of intermediated labor markets, whose importance in new job creation is rising. We analytically show that: (1) the surplus to recruiters from successful monopolistic intermediation appears directly and additively in the surplus-sharing condition between newly matched workers and firms; (2) the surplus that accrues to monopolistic recruiters arises due to aggregate increasing returns in matching; (3) deviations from efficient wage setting (Nash-Hosios) in non-intermediated random-search markets spill over into recruiter creation and matching via intermediated markets, but deviations from efficient matching aggregation in recruiting markets have no impact on non-intermediated markets; and (4) in general equilibrium, the aggregate increasing returns in matching expands the aggregate resource frontier. We quantitatively show how the implications of wage distortions in non-intermediated markets on aggregate unemployment and labor force participation depend on the existence of intermediated labor markets.
Searching for Wages in an Estimated Labor Matching Model (with Ryan Chahrour and Tristan Potter).
We estimate a real business cycle economy with search frictions in the labor market in which the latent wage follows a non-structural ARMA process. The estimated model does an excellent job matching a broad set of quantity data and wage indicators. Under the estimated process, wages respond immediately to shocks but converge slowly to their long-run levels, inducing substantial variation in labor's share of surplus. These results are not consistent with either a rigid real wage or flexible Nash bargaining. Despite inducing a strong endogenous response of wages, neutral shocks to productivity account for the vast majority of aggregate fluctuations in the economy, including labor market variables.
Optimal Fiscal Policy with Labor Selection (with Wolfgang Lechthaler and Christian Merkl).
This paper characterizes long-run and short-run optimal fiscal policy in the labor selection framework. Quantitatively, the volatility of the labor income tax rate is orders of magnitude larger than the "tax-smoothing" results based on Walrasian labor markets, but is a few times smaller than the results based on search and matching labor markets. To understand the results, we develop a welfare-relevant analytic concept of "tightness" for the selection model. This concept of tightness is the source of the decentralized economy's inefficient wage premia between the average newly-hired worker and the marginal newly-hired worker. Compared to the well-known concept of "labor-market tightness" in the search and matching literature, this new concept of tightness plays a highly similar role, and, like in the matching model, is crucial for understanding efficiency and optimal policy.
Optimal Fiscal Policy with Endogenous Product Variety (with Fabio Ghironi).
We study Ramsey-optimal fiscal policy with endogenous product creation by forward-looking firms. Optimal policy balances monopoly incentives for entry with the welfare benefit of product variety. Depending on preferences over variety, it may be optimal to tax or subsidize firmsʼ dividend payments (or product creation) in the long run. Over the cycle, optimal policy induces smaller, but efficient, fluctuations of capital and labor markets than under calibrated exogenous policy. Decentralization requires zero intertemporal distortions and constant static distortions. We relate our results to Ramsey theory by developing welfare-relevant concepts of efficiency that take into account product creation.