• Open Access

Aggregate labor market outcomes: The roles of choice and chance

Authors

  • Per Krusell,

    1. IIES, CAERP, CEPR, and NBER; Per.Krusell@iies.su.se
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    • 1

      Some of the material in this paper was previously contained in our paper titled “Labor supply in a frictional labor market.” We thank the editor, Nicola Pavoni, Naoki Shintoyo, and two anonymous referees for useful comments, as well as seminar participants at CEMFI, Columbia, Universitat Autonoma de Barcelona, USC, UCLA, the Atlanta Fed, Yale, UC Riverside, Queen's, Georgetown, Wharton, Toronto, Ryerson, Western Ontario, Stockholm School of Economics, IIES, University of Oslo, Concordia, Northern Illinois, Yonsei University, Korea University, Ohio State, Notre Dame, Penn State, Indiana, Maryland, and George Washington, as well as conference participants at the Labor Markets Conference at the IFS (2008), the Winter Institute of Macroeconomics 2009 (Tokyo), the Bewley Conference at UT Austin, and the 2009 SED Conference. We thank Joe Song for excellent research assistance. Krusell thanks the NSF for financial support, Mukoyama thanks the Bankard Fund for Political Economy for financial support, and Rogerson thanks the NSF and the Korean Science Foundation (WCU-R33-10005) for financial support. The views expressed in this article are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.

  • Toshihiko Mukoyama,

    1. University of Virginia and CIREQ; tm5hs@virginia.edu
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  • Richard Rogerson,

    1. Arizona State University and NBER; Richard.Rogerson@asu.edu
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  • Ayşegül Şahin

    1. Federal Reserve Bank of New York; Aysegul.Sahin@ny.frb.org
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Abstract

Commonly used frictional models of the labor market imply that changes in frictions have large effects on steady state employment and unemployment. We use a model that features both frictions and an operative labor supply margin to examine the robustness of this feature to the inclusion of an empirically reasonable labor supply channel. The response of unemployment to changes in frictions is similar in both models, but the labor supply response present in our model greatly attenuates the effects of frictions on steady state employment relative to the simplest matching model and two common extensions. We also find that the presence of empirically plausible frictions has virtually no impact on the response of aggregate employment to taxes.

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