Discount Factor Shocksand Labor MarketDynamics

Abstract

In this paper we investigate the labor market dynamics in a matching model where fluctuations are driven by movements in the discount factor. A comparison with the standard productivity shock is provided. Movements in the discount factor can be used as a proxy for variations in financial risks, especially the expected payoff from hiring workers. It is shown that the canonical matching model under a very standard calibration is able to generate an important volatility of unemployment and vacancies with respect to output. We estimate the structural model with the two shocks and using the Bayesian methodology. The bulk of variations in unemployment and vacancies is mainly explained by disturbances pertaining to the discount factor. Productivity shocks account for most of the historical output variations but the discount factor plays a more important role over the last two decades.