Working Papers
Evolving Beveridge Curve Dynamics, with Michael Ellington and Chris Martin
Can the Stochastic Discount Factor Explain Unemployment Fluctuations?
Publications
(Listed in order of acceptance date)
The Fundamental Surplus Revisited Review of Economic Dynamics, Vol.51, 2023.
To generate large responses of unemployment to productivity changes requires a high elasticity of the fundamental surplus with respect to productivity. When all deductions that enter the fundamental surplus are acyclical, and the fundamental surplus does not involve endogenous variables, then the elasticity of the fundamental surplus coincides with the inverse of the fundamental surplus fraction.
Revisiting Real Wage Rigidity, with Michael Ellington and Chris Martin Journal of Money, Credit and Banking, Vol.56(2-3), 2024.
In this paper, we provide empirical evidence that real wage rigidity is not a major cause of unemployment volatility. We argue that there is a disconnect between the theoretical and empirical literatures on this topic. While theoretical studies define real wage rigidity as the response of wages to changes in unemployment following productivity shocks, the empirical literature measures real wage rigidity as the estimated semi-elasticity of wages with respect to unemployment, averaged over all shocks. We show that averaging over shocks gives a biased measure of real wage rigidity, as the impact of other shocks confounds the response to productivity shocks. Our results indicate that the estimated semi-elasticity with respect to productivity shocks is twice as large as the estimated semi-elasticity averaged over all shocks. This implies that one cannot attribute unemployment volatility to real wage rigidity.
Search Frictions and Evolving Labour Market Dynamics, with Michael Ellington and Chris Martin Journal of Economic Dynamics and Control, Vol.127, 2021.
This paper puts search frictions models under novel empirical scrutiny. To capture changing dynamics, we fit a Bayesian time-varying parameter VAR to US labour market data from 1965–2016. Using a DSGE model with Search Frictions, we identify several structural shocks, including a shock to worker bargaining power that we name a wage shock. We argue that the wage shock is a key driver of cyclical variation, explaining a higher proportion of the variation of these variables than productivity, demand or job separation shocks. We also document stark differences between empirical and theoretical impulse response functions that cast doubt on the core transmission mechanism of search and matching models.
A Note on the Unemployment Volatility Puzzle: is Credible Bargaining the Answer Macroeconomic Dynamics, Vol.26(1), 2020.
This paper shows that the ability of the credible wage bargaining model to match the observed unemployment volatility hinges on an unrealistic assumption about disagreement payoffs to the firm. Relaxing this assumption can lead to the substantial wage flexibility. As a consequence, the model is unable to capture the observed unemployment volatility.
Search, Shirking and Labor Market Volatility, with Chris Martin Journal of Macroeconomics, Vol.66, 2020.
This paper proposes a modified version of the standard search and matching model of the labour market that includes a shirking mechanism. We show that our model delivers a close match to the simulated volatilities, correlations and autocorrelations of unemployment, vacancies, labour market tightness and the job finding rate with values observed in US data. In doing so, it outperforms prominent alternative models. Our model also has novel policy implications for the impact of income taxes, subsidies on hiring and employment taxes on unemployment and its volatility.
Endogenous Real Wage Rigidity in a Search Frictions Model, with Chris Martin Oxford Economic Papers, Vol.70(4), 2018.
The existing literature often incorporates ad hoc models of exogenous real wage rigidity into search frictions models of the labour market in order to match the large volatility of unemployment observed in the data. In this paper, we develop an alternative version of the search frictions model that incorporates insights from behavioural economics. We derive a model in which endogenous real wage rigidity emerges from optimal wage-setting and show that this model can match the observed volatility of unemployment. Thus our proposed model can match the data as closely as the existing literature but without the disadvantage of assuming exogenous and ad hoc forms of real wage rigidity.
Work in Progress
Minimum Wages, Firm-Level Investment, and Labour Productivity
The Limited Influence of Unemployment Benefits on the Wage Bargain
The Evolution of the Phillips Multiplier, with Michael Ellington and Chris Martin