Labor-Market Volatility in the Search-and-Matching Model: The Role of Investment-Specific Technology Shocks Articles uri icon



publication date

  • August 2010

start page

  • 1509

end page

  • 1527


  • 8


  • 34

International Standard Serial Number (ISSN)

  • 0165-1889

Electronic International Standard Serial Number (EISSN)

  • 1879-1743


  • Shocks to investment-specific technology have been identified as a main source of U.S. aggregate output volatility. In this paper, we present a model with frictions in the labor market and
    explore the contribution of these shocks to the volatility of labor
    market variables, namely, unemployment, vacancies, tightness and the
    job-finding rate. Thus, our paper contributes to a recent body of
    literature assessing the ability of the search-and-matching model to
    account for the large volatility observed in labor market variables. To
    this aim, we solve a neoclassical economy with search and matching,
    where neutral and investment-specific technologies are subject to
    shocks. The three key features of our model economy are: (i) Firms are
    large, in the sense that they employ many workers. (ii) Adjusting
    capital and labor is costly. (iii) Wages are the outcome of an
    intra-firm Nash-bargaining problem between the firm and its workers. In
    our calibrated economy, we find that shocks to investment-specific
    technology explain 40% of the observed volatility in U.S. labor
    productivity. Moreover, these shocks generate relative volatilities in
    vacancies and the workers' job finding rate which match those observed
    in U.S. data. Relative volatilities in unemployment and labor market
    tightness are 55% and 75% of their empirical values, respectively.