Essays on Labor Market Frictions and Macroeconomics

Abstract

This dissertation investigates the macroeconomic consequences of frictional labor markets in the United States and in Europe. It consists of three essays. In Chapter 2, Jiwoon Kim and I develop a model with both frictional labor markets and financial frictions to explore how the dynamics of real and financial variables are affected by `financial shocks'. We evaluate how important the inclusion of financial shocks is in accounting for labor market fluctuations by using a standard real business cycle model with search and matching as a benchmark. We find that the inclusion of financial frictions and financial shocks improves a standard matching model's ability to account for the observed dynamics of labor market variables. Financial frictions are able to generate more volatile hours per worker, labor shares, and employment relative to our benchmark matching model, bringing simulated moments closer to observed fluctuations. Chapter 3 documents the cyclical properties of labor market flows in the United States and in Europe at business cycle frequencies. I create comparable quarterly estimates of the hazard rates across 19 European countries and the United States using the methodology pioneered by Shimer (2012). I then quantitatively assess the contribution of the job-finding and separation rates to the variability of unemployment over the business cycle in each country. In the United States, the job-finding hazard rate accounted for over three-quarters of the variation in unemployment while the separation rate accounted for the remainder. Most European labor markets have a 60:40 split between the job-finding rate and the separation rate, respectively. Chapter 4 studies policy issues related to precarious forms of employment over a worker's life-cycle. A search and matching model with dual labor markets, overlapping generations of workers, and general and match-specific skills is presented in order to quantify and evaluate the effects of loosening restrictions on temporary forms of employment. Despite the increased likelihood of being employed, workers will be worse off due to a greater share of workers starting their careers in low-paying temporary positions, limiting young workers' ability to upgrade their skill level early in the life-cycle.