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Labour-market matching with precautionary savings and aggregate fluctuations

Krusell, Per, Mukoyama, Toshihiko and Sahin, Aysegul (2010) Labour-market matching with precautionary savings and aggregate fluctuations. Review of Economic Studies, 77 (4). pp. 1477-1507. ISSN 0034-6527

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Identification Number: 10.1111/j.1467-937X.2010.00700.x


We analyse a Bewley-Huggett-Aiyagari incomplete-markets model with labour-market frictions. Consumers are subject to idiosyncratic employment shocks against which they cannot insure directly. The labour market has a Diamond-Mortensen-Pissarides structure: firms enter by posting vacancies and match with workers bilaterally, with match probabilities given by an aggregate matching function. Wages are determined through Nash bargaining. We also consider aggregate productivity shocks and a complete set of contingent claims conditional on this risk. We use the model to evaluate a tax-financed unemployment insurance scheme. Higher insurance is beneficial for consumption smoothing, but because it raises workers' outside option value, it discourages firm entry. We find that the latter effect is more potent for welfare outcomes; we tabulate the effects quantitatively for different kinds of consumers. We also demonstrate that productivity changes in the model—in steady state as well as stochastic ones—generate rather limited unemployment effects, unless workers are close to indifferent between working and not working; thus, recent findings are corroborated in our more general setting.

Item Type: Article
Official URL:
Additional Information: © 2014 Review of Economic Studies Ltd
Divisions: LSE
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HC Economic History and Conditions
JEL classification: J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J64 - Unemployment: Models, Duration, Incidence, and Job Search
Date Deposited: 01 Jul 2014 11:30
Last Modified: 20 Sep 2021 00:54
Funders: National Science Foundation, Mukoyama thanks the Bankard Fund for Political Economy

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