Your SlideShare is downloading. ×
Labor Market Participation, Unemployment and Monetary Policy
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Saving this for later?

Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime - even offline.

Text the download link to your phone

Standard text messaging rates apply

Labor Market Participation, Unemployment and Monetary Policy

476
views

Published on

Alessia Campolmi and Stefano Gnocchi

Alessia Campolmi and Stefano Gnocchi

Published in: Economy & Finance, Technology

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
476
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
4
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Labor Market Participation, Unemployment and Monetary Policy Alessia Campolmi1 Stefano Gnocchi2 1 Central European University and Magyar Nemzeti Bank 2 Universitat Autònoma de Barcelona and MOVE Trobada BGSE 2011 October 21st, 2011Campolmi and Gnocchi () Labor Market Participation 1 / 37
  • 2. MotivationNew-Keynesian Perspectives on Business Cycles andLabor MarketsLarge literature exploring the implications of two main frictions formacroeconomic uctuations Nominal price rigidities: ination, monetary policy and the business cycle. Calvo (1983), Yun (1996), King and Wolman (1996), Walsh (2003), Woodford (2003), Galí (2008) Labor market matching frictions: unemployment uctuations and the business cycle. Diamond (1982), Mortensen (1982), Pissarides (1984) Campolmi and Gnocchi () Labor Market Participation 2 / 37
  • 3. MotivationNew-Keynesian Perspectives on Business Cycles andLabor MarketsInteraction between nominal rigidities and labor market frictions calledinto question to explain Phillips and Beveridge Curves: Chéron and Lanogot (2000) Persistence of monetary policy shocks: Walsh (2005), Trigari (2009) Ination dynamics: Christoel and Linzert (2005) The role of real wage rigidities: Gertler and Trigari (2009), Krause and Lubik (2007), Sveen and Weinke (2008). Campolmi and Gnocchi () Labor Market Participation 3 / 37
  • 4. MotivationThe Missing MarginNK-DMP imports from the DMP strand the assumption of inelasticlabor force. This implies: Households cannot substitute unemployment with voluntary non-employment Campolmi and Gnocchi () Labor Market Participation 4 / 37
  • 5. MotivationThe Missing MarginYet, PARTICIPATION MOVESTable: Percentage standard deviations of output and selected unconditionalmoments (relative to output) - U.S. data: 1964-2007, HP-ltered Unconditional Moments Data Output volatility 1.53 Unemployment rate volatility 7.40 Employment volatility 0.63 Participation rate volatility 0.20 Correlation of Participation with Output 0.42 Barnichon and Figura, 2010: labor supply components account for 1/4 of unemployments variance at business cycle frequency. They explain most of the low frequency movements. Campolmi and Gnocchi () Labor Market Participation 5 / 37
  • 6. Our Paper: OverviewOur Contribution We consider the baseline NK-DMP model; We introduce the participation choice by making costly the entry to the labor market, modelling home production activity and search activity as both requiring time; We calibrate the model to US data; We draw policy implications and we show that neglecting the participation margin leads to incorrect evaluation of the eects of monetary policyCampolmi and Gnocchi () Labor Market Participation 6 / 37
  • 7. Our Paper: OverviewResults PreviewMoving from Flexible to Strict Ination Targeting: Exogenous Participation ⇒ increases volatility of unemployment and employment rates; Endogenous Participation ⇒ reduces the volatility of unemployment and employment rates while increasing the volatility of participation.Intuition: exogenous participation models abstract from substitutionbetween unemployment and non-participation Campolmi and Gnocchi () Labor Market Participation 7 / 37
  • 8. The ModelModel Setup HOUSEHOLDS Innitely many members consuming a composite consumption good and home production; perfect insurance Each member can be employed, unemployed or non-participant Unemployed and Non-participants home produce FIRMS Final goods producers: monopolistic competition and price rigidity Intermediate goods producers: perfect competition and matching frictions Final goods sector Intermediate goods sector MONETARY POLICY: Central bank sets the nominal rate responding to ination Monetary PolicyCampolmi and Gnocchi () Labor Market Participation 8 / 37
  • 9. The Model HouseholdsHouseholds decision problem HH F.O.C. Households choose Ct , Dt and Nt so as to maximize: ∞ ht 1+ν E0 β t Zt log(Ct ) + φ (1) 1+ν t=0 subject to: −1 Pt Ct + Rt Dt ≤ Dt−1 + Wt Et + Pt bUt + Tt (2) ht = [ξt (1 − Et − ΓUt )]1−αh (3) Et = (1 − ρ)Et−1 + ft (Nt − (1 − ρ)Et−1 ) (4) Nt = Et + Ut (5)Campolmi and Gnocchi () Labor Market Participation 9 / 37
  • 10. The Model Calibration and Steady StateSome Conventional Parameters Table 2: Parameter Values Parameter Mnemonic Value Discoun Factor β 0.99 Inter. elast. of subst. participation ν -5 Elast. Substitution 6 Workers Bargaining Power 1−η 0.6 Calvo Parameter ξ 2/3 Separation Rate ρ 0.12 Matching Elasticity γ 0.6 Returns to Employment 1−α 2/3 Returns to Home production 1 − αh 2/3 Ination Reaction Coecient φπ 1.5Campolmi and Gnocchi () Labor Market Participation 10 / 37
  • 11. The Model Calibration and Steady StateTargets Table 3: Steady State Moments Targets Value U.S. Data Employment Rate 0.94 Participation Rate 0.64 Job Filling Rate (q ) 2/3 Replacement Rate (b/w) 0.4 Vacancy Cost as fraction of wages (κ/(w ∗ q)) 0.045 Table 4: Implied Parameters Parameter Mnemonic Value Matching Eciency ω 0.66 Vacancy Cost κ 0.0196 Search Cost Γ 0.44 Preference Shifter Φ 0.04 Unemployment Benet b 0.2617Campolmi and Gnocchi () Labor Market Participation 11 / 37
  • 12. The Model Second Moments IRMTFP IRPref IRHTFPTable: Matching unconditional moments. Both models have been calibratedso as to give the best possible t for the rst 4 moments. Unconditional Moments Data Endogenous Exogenous Output volatility 1.53 1.43 1.56 Unemployment rate volatility 7.40 7.36 7.55 Employment volatility 0.63 0.67 0.47 Corr. Unempl. rate with Output -0.85 -0.75 -1 Participation rate volatility 0.20 0.24 - Corr. of Part. with Output 0.42 0.56 - Calibrated Parameters st.dev. market TFP 0.0070 0.0074 st.dev. home TFP 0.0037 0.0070 st.dev. preference shock 0.0147 0 corrA,AH 0.9474 1 Campolmi and Gnocchi () Labor Market Participation 12 / 37
  • 13. Results: Participation, Frictions and Monetary Policy Incentives The Participation Choice Matching frictions generate undesirable movements in home production ⇒ home production gap: ht (nt , ft ) − h∗ t Participation uctuates to close the gap and replicate exible labor market home production Figure 1 Campolmi and Gnocchi () Labor Market Participation 13 / 37
  • 14. Results: Participation, Frictions and Monetary Policy Policy Experiment Participation and Monetary Policy How do second moments change if monetary policy switches from exible (φ = 1.5) to strict (φ = 100) ination targeting? How does the presence of the participation margin aect the answer? What is the relevance of the search cost? Campolmi and Gnocchi () Labor Market Participation 14 / 37
  • 15. Results: Participation, Frictions and Monetary Policy Policy Experiment Table: Percentage standard deviations of output and of selected moments (relative to output) in the endogenous and exogenous participation models, conditionally on market technology shocks. The table reports the value of moments under strict ination targeting. In parenthesis it is reported the value for an ination coecient equal to 1.5 in the Taylor rule. Moments Cond. on MTFP Shocks Endogenous Exogenous Output volatility 1.24 (1.12) 1.17 (1.08) Unempl. rate volatility 8.33 (5.40) 2.07 (0.12) Empl. volatility 0.20 (0.07) 0.13 (0.008) Empl. rate volatility 0.52 (0.34) 0.13 (0.008) Part. rate volatility 0.32 (0.27) 0 (0) Corr. of Part. with Output -0.99 (-0.99) 0 (0) Corr. of Unempl. rate with Output -1 (-1) -1 (-1) Campolmi and Gnocchi () Labor Market Participation 15 / 37
  • 16. Results: Participation, Frictions and Monetary Policy Policy Experiment Endogenous Vs Exogenous: TFP Shocks Strict ination targeting makes vacancy posting more volatile under both models If participation free to vary, households substitute unemployed with non-participation Volatility of the labor force increases, counterbalancing the surge in volatility of vacancy posting The volatility of employment and unemployment rates increase by less than under exogenous participation Pref. Shock Home Tech. Shock Campolmi and Gnocchi () Labor Market Participation 16 / 37
  • 17. Results: Participation, Frictions and Monetary Policy Policy Experiment Monetary Policy: Unconditional Moments Exogenous Participation ⇒ strict ination targeting increases volatility of unemployment rate, employment and employment rate; Endogenous Participation ⇒ strict ination targeting reduces the volatility of unemployment rate, employment and employment rate while increasing the volatility of participation. Unconditional Moments Campolmi and Gnocchi () Labor Market Participation 17 / 37
  • 18. ConclusionsConclusions Participation responds to frictions and changes in monetary policy aect the relevance of frictions Models overlooking participation may deliver wrong policy implications The strength of the channel depends on the search costs Search CostCampolmi and Gnocchi () Labor Market Participation 18 / 37
  • 19. HouseholdsHouseholds rst order conditionsWe dene the utility loss needed to marginally increase employment as α (1 − ft ) φΓhν Ct h − 1−α Ωt ≡ t ξt (1 − αh )ht h −b (6) ft Zt Participation condition α Wt φhν Ct t h − 1−α βCt (1 − ρ) Zt+1 Ωt = − ξt (1 − αh )ht h + Et Ωt+1 Pt Zt Ct+1 Zt Euler equation Ct Zt+1 Pt βRt Et =1 (7) Ct+1 Zt Pt+1 Back Campolmi and Gnocchi () Labor Market Participation 19 / 37
  • 20. HouseholdsThe Participation Condition Frictions introduce a wedge between home production and employment decision Increase in ft increases participation, given Ct ⇒ substitute home production with consumption Increase in Ct reduces participation, given ft ⇒ wealth eectForces driving participation choice Finding rates Marginal rate of substitution between consumption and home production Back Campolmi and Gnocchi () Labor Market Participation 20 / 37
  • 21. Firms-Intermediate GoodsMatching frictions Production function of producer j when matched with a worker Xt (j) = At (8) To nd a worker j needs to open a vacancy and search paying κ nal goods Labor market tightness: θt ≡ St V t Job lling rate: qt ≡ ωθt , −γ Job nding rate: ft ≡ θt qt . Free entry condition in the market of intermediate producers determine vacancy posting κ Px Wt κ = t At − + (1 − ρ)Et Qt,t+1 (9) qt Pt Pt qt+1 BackCampolmi and Gnocchi () Labor Market Participation 21 / 37
  • 22. Firms-Intermediate GoodsWage Bargaining Value of employment α Wt φhν (1 − Γ)Ct − 1−αh Vtw = −b− t ξt (1 − αh )ht h + (10) Pt Zt w Et Qt,t+1 (1 − ρ)(1 − ft+1 )Vt+1 Nash Bargaining (η : rms bargaining power) ηVtw = (1 − η)VtJ (11) Wage equation α Wt Px φhν (1 − Γ)Ct h − 1−α = (1 − η) t At + η b + t ξt (1 − αh )ht h Pt Pt Zt + (1 − η)(1 − ρ)Et {Qt,t+1 κθt+1 } (12) BackCampolmi and Gnocchi () Labor Market Participation 22 / 37
  • 23. Firms-Final GoodsSticky prices Production function Yt (i) = Xt (i)1−α (13) Demand −ε Pt (i) Yt (i) = [Ct + κVt ] (14) Pt Phillips Curve Ptx πt = βEt {πt+1 } + λ + αxt (15) Pt (1−ξ)(1−βξ) 1−α λ= ξ 1−α+αε BackCampolmi and Gnocchi () Labor Market Participation 23 / 37
  • 24. Monetary PolicyMonetary Policy Simple Taylor rule log(Rt ) = − log(β) + φπ πt (16) BackCampolmi and Gnocchi () Labor Market Participation 24 / 37
  • 25. Monetary PolicyFigure: Impulse Responses to a market production TFP shock ComparisonAcross Models Home Production FLEXIBLE PRICES Participation FLEXIBLE PRICES 0.04 0 CG 0.02 Exog.Part. 0.05 % deviation from stst. % deviation from stst. No Frictions 0 0.1 0.02 0.15 0.04 0.2 0.06 0.25 0 2 4 6 8 10 0 2 4 6 8 10 Time Time Home Production STICKY PRICES Participation STICKY PRICES 0.06 0 0.05 % deviation from stst. % deviation from stst. 0.05 0.04 0.03 0.1 0.02 0.01 0.15 0 0.01 0.2 0 2 4 6 8 10 0 2 4 6 8 10 Time Time Back Campolmi and Gnocchi () Labor Market Participation 25 / 37
  • 26. Monetary PolicyFigure: Two calibrations of the search cost: high (η = 0.05) and low (η = 0.4)- Flexible Prices Home Production BIGGAMMA=0.44 Participation BIGGAMMA=0.44 0.04 0 CG 0.02 Exog.Part. 0.05 % deviation from stst. % deviation from stst. No Frictions 0 0.1 0.02 0.15 0.04 0.2 0.06 0.25 0 2 4 6 8 10 0 2 4 6 8 10 Time Time 3 Home Production BIGGAMMA=0.99 3 x 10 x 10 Participation BIGGAMMA=0.99 5 0 4 % deviation from stst. % deviation from stst. 1 3 2 2 1 3 0 1 4 0 2 4 6 8 10 0 2 4 6 8 10 Time Time Back Campolmi and Gnocchi () Labor Market Participation 26 / 37
  • 27. Monetary PolicyFigure: Two calibrations of the search cost: high (η = 0.05) and low (η = 0.4)- Sticky Prices Home Production BIGGAMMA=0.44 Participation BIGGAMMA=0.44 0.06 0 CG 0.05 Exog.Part. % deviation from stst. % deviation from stst. No Frictions 0.05 0.04 0.03 0.1 0.02 0.01 0.15 0 0.01 0.2 0 2 4 6 8 10 0 2 4 6 8 10 Time Time Home Production BIGGAMMA=0.99 Participation BIGGAMMA=0.99 0.06 0 0.05 0.01 % deviation from stst. % deviation from stst. 0.04 0.03 0.02 0.02 0.03 0.01 0.04 0 0.01 0.05 0 2 4 6 8 10 0 2 4 6 8 10 Time Time Back Campolmi and Gnocchi () Labor Market Participation 27 / 37
  • 28. Monetary Policy Figure: Impulse Responses to a market production TFP shock Participation Employment % deviation from stst. % deviation from stst. 0 0.06 0.05 0.04 0.1 0.02 0.15 0.2 0 0 2 4 6 8 10 0 2 4 6 8 10 Time Time Unemployment Rate GDP % deviation from stst. % deviation from stst. 1 1 0.8 2 0.6 3 0.4 4 0.2 0 2 4 6 8 10 0 2 4 6 8 10 Time Time Home Production TFP Shock % deviation from stst. % deviation from stst. 0.06 1 0.05 0.8 0.04 0.6 0.03 0.4 0.02 0.2 0 2 4 6 8 10 0 2 4 6 8 10 Time Time BackCampolmi and Gnocchi () Labor Market Participation 28 / 37
  • 29. Monetary Policy Figure: Impulse Responses to a preference shock Participation Employment % deviation from stst. % deviation from stst. 0.2 0.4 0.15 0.3 0.1 0.2 0.05 0 0.1 0 2 4 6 8 10 0 2 4 6 8 10 Time Time Unemployment Rate GDP % deviation from stst. % deviation from stst. 1 0.25 1.5 0.2 2 0.15 2.5 0.1 3 0.05 0 2 4 6 8 10 0 2 4 6 8 10 Time Time Home Production Preference Shock % deviation from stst. % deviation from stst. 0.05 1 0.1 0.8 0.15 0.6 0.2 0.4 0.25 0.2 0 2 4 6 8 10 0 2 4 6 8 10 Time Time BackCampolmi and Gnocchi () Labor Market Participation 29 / 37
  • 30. Monetary Policy Figure: Impulse Responses to a home productivity shock Participation Employment % deviation from stst. % deviation from stst. 0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 0 2 4 6 8 10 0 2 4 6 8 10 Time Time Unemployment Rate GDP % deviation from stst. % deviation from stst. 3 0.25 0.2 2 0.15 1 0.1 0 0.05 0 2 4 6 8 10 0 2 4 6 8 10 Time Time Home Production Home Productivity Shock % deviation from stst. % deviation from stst. 0.25 1 0.2 0.8 0.15 0.6 0.1 0.4 0.05 0.2 0 2 4 6 8 10 0 2 4 6 8 10 Time Time BackCampolmi and Gnocchi () Labor Market Participation 30 / 37
  • 31. The Other ShocksTable: Percentage standard deviations of output and of selected moments(relative to output) in the endogenous and exogenous participation models,conditionally on preference shocks. The table reports the value of momentsunder strict ination targeting. In parenthesis it is reported the value for anination coecient equal to 1.5 in the Taylor rule. Moments Cond. on Preference Shocks Endogenous Exogenous Output volatility 0.29 (0.60) 0 (0) Unempl. rate volatility 7.56 (15.91) 23.97 (23.97) Empl. volatility 1.5 (1.5) 1.5 (1.5) Empl. rate volatility 0.47 (1.00) 1.5 (1.5) Part. rate volatility 1.92 (0.52) 0 (0) Corr. of Part. with Output 0.99 (0.98) 0 (0) Corr. of Unempl. rate with Output 0.85 (-0.99) -1 (-1) Back Campolmi and Gnocchi () Labor Market Participation 31 / 37
  • 32. The Other ShocksEndogenous Vs Exogenous: Preference shocks Participation correlates positively with output and negatively with unemployment Strict ination targeting magnies participation volatility Constant volatility of employment, greater ows of searching workers dampen volatility of employment rates NO ACTION IN EXOGENOUS PARTICIPATION MODEL BackCampolmi and Gnocchi () Labor Market Participation 32 / 37
  • 33. The Other ShocksTable: Percentage standard deviations of output and of selected moments(relative to output) in the endogenous and exogenous participation models,conditionally on home technology shocks. The table reports the value ofmoments under strict ination targeting. In parenthesis it is reported thevalue for an ination coecient equal to 1.5 in the Taylor rule. Moments Cond. on HTFP Shocks Endogenous Exogenous Output volatility 0.20 (0.18) 0.52 (0.49) Unempl. rate volatility 7.21 (9.63) 23.97 (23.97) Empl. volatility 1.5 (1.5) 1.5 (1.5) Empl. rate volatility 0.45 (0.60) 1.5 (1.5) Part. rate volatility 1.89 (2.10) 0 (0) Corr. of Part. with Output 0.99 (1) 0 (0) Corr. of Unempl. rate with Output 0.84 (0.98) -1 (-1) Back Campolmi and Gnocchi () Labor Market Participation 33 / 37
  • 34. The Other ShocksEndogenous Vs Exogenous: Home TFP shocks Participation correlates positively with output and with unemployment Strict ination targeting dampens participation volatility Constant volatility of employment, smaller ows of searching workers dampen volatility of employment rates NO ACTION IN EXOGENOUS PARTICIPATION MODELBackCampolmi and Gnocchi () Labor Market Participation 34 / 37
  • 35. The Other ShocksTable: Percentage standard deviations of output and of selected unconditionalmoments (relative to output) in the endogenous and exogenous participationmodels. The table reports the value of moments under strict inationtargeting. In parenthesis it is reported the value for an ination coecientequal to 1.5 in the Taylor rule. Unconditional Moments Endogenous Exogenous Output volatility 1.46 (1.43) 1.69 (1.56) Unempl. rate volatility 6.52 (7.35) 8.79 (7.57) Empl. volatility 0.48 (0.67) 0.55 (0.47) Empl. rate volatility 0.41 (0.46) 0.55 (0.47) Part. rate volatility 0.40 (0.24) 0 (0) Corr. of Part. with Output 0.13 (0.56) 0 (0) Corr. of Unempl. rate with Output -0.90 (-0.76) -1 (-1) Back Campolmi and Gnocchi () Labor Market Participation 35 / 37
  • 36. The Search CostMonetary Policy: MTFP Shock - High Search Cost ConclusionsTable: Percentage standard deviations of output and of selected moments(relative to output) in the endogenous and exogenous participation models,conditionally on MTFP shocks. Here we depart from the baseline calibrationand we assume a high households search cost, equal to 0.99. The tablereports the value of moments under strict ination targeting. In parenthesis itis reported the value for an ination coecient equal to 1.5 in the Taylor rule. Volatility Endogenous Exogenous Values ∆% Values ∆% Empl. rate 0.1100 (0.0699) 52.47% 0.1107 (0.0726) 64.42% Unempl. rate 1.7682 (1.1606) 52.35% 1.7580 (1.0689) 64.46% Part. rate 0.0048 (0.0583) 0 (0) Campolmi and Gnocchi () Labor Market Participation 36 / 37
  • 37. The Search CostEndogenous Vs Exogenous: Search Cost If search cost is high, the participation margin matters less, be prices sticky or not Then, policy mistakes are less important ConclusionsCampolmi and Gnocchi () Labor Market Participation 37 / 37