Financial Shocks and Labor Market
Fluctuations
Francesco Zanetti
University of Oxford
May 2015
Recent research shows that shocks that
originate in the financial sector are important factors in explaining business
cycle fluctuations.
Estimate the (real business cycle) model
using Bayesian methods
Impulse response functions of the estimated
model show that financial shocks are powerful in altering the firm’s flows of
financing and labor market variables such as vacancy posting unemployment and
wages.
The wage equals the marginal rate of
substitution between consumption and leisure plus current lining costs minus
the expected savings in terms of the future hiring costs if the match continues
in period t+1
The firm increases the employment shock nt+1 available during period
The firm maximizes its total real expected equity payment
Measures the marginal utility value depend on:
the marginal product of laborthe
Empirical test:
the sharp increase in vacancies and fall in unemployment raises labor market tightness, which in turn increases the cost of posting vacancies, reducing the wagethe increase in output induces the firm to adjust its financial position by raising equity payouts and reducing debt issuingthe shock increases unemployment and reduces output and investmentthe fall in consumption decreases the marginal rate of substitution between consumption and leisureshocks to the job distraction rate are important for the dynamics of the unemployment rate
The paper states:
financial shocks are an important source of fluctuations in wagesshocks to the job destruction rate are important for unemployment fluctuation, thereby suggesting that including an endogenous job destruction rate would certainly be a useful extensionit would be interesting to enrich the theoretical framework with nominal rigidities and extend the analysis to include a monetary authority and nominal variables such as inflation.
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