Searching for Wages in an Estimated Labor Matching Model (with Ryan Chahrour and Tristan Potter).
Abstract:
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.
PDF file, April 2017 version
Optimal Fiscal Policy with Labor Selection (with Wolfgang Lechthaler and Christian Merkl).
Abstract:
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.
PDF file, April 2017
Optimal Fiscal Policy with Endogenous Product Variety (with Fabio Ghironi).
Abstract:
We study Ramsey-optimal fiscal policy in an economy in which product creation is the result of forward-looking investment decisions by firms. There are two main results. First, depending on the particular form of variety aggregation, firms' dividend payments may be either subsidized or taxed in the long run. This policy balances monopoly incentives for product creation with the welfare benefit of product variety. In the most empirically relevant form of variety aggregation, socially efficient outcomes entail a substantial tax on dividend income, removing the incentive for over-accumulation of capital, which takes the form of the stock of products. Similar intuitions determine the optimal setting of long-run producer entry subsidies. Second, optimal policy induces dramatically smaller, but efficient, fluctuations of both capital and labor markets than in a calibrated exogenous policy. Decentralization requires zero intertemporal distortions and constant static distortions over the cycle. The results relate to Ramsey theory, which we show by developing welfare-relevant concepts of efficiency that take into account product creation. The results on optimal entry subsidies provide guidance for the study of product market reforms in dynamic macro models.
PDF file, June 2015 version
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