This thesis consists of three theoretical chapters, all related to the response of unemployment to shocks and the role of active and passive labour market policies. Throughout the thesis, unemployment is assumed to evolve as a result of the uncoordinated nature of the labour market along the lines outlined in the Diamond-Mortensen-Pissarides equilibrium search and matching model. Chapter 2 examines the effects of employment policies on vacancy creation and allocation decisions of firms and unemployment across workers with different skills. We develop a partial equilibrium model with heterogeneous high- and low-tech jobs and with skilled and unskilled workers, which we motivate by the stark evidence on the incidence of cross-skill employment (which crowds out unskilled workers, e.g. evidence for the US, the UK and the EU put these at 58%, 32%, and 35%, respectively). We show that certain employment protection policies could, in fact, lead to a reduction in job creation and might alter the allocation of vacancies across low- and high-tech job type. We find that: (i) skilled workers benefit while unskilled workers experience high jobless rate; (ii) policy effects differ when they are skill-specific; (ii) stricter policies can have more severe consequences; and (iv) vacancy creation subsidy can play a key role in reducing unemployment across worker type as well as alleviating the cross-skill crowding out of jobs. Against conventional wisdom, we demonstrate that severance compensation can have a ‘real’ effect on job creation decision, provided there is some degree of strictness in its enforcement. Motivated by the extensive use of fiscal stimulus policies and labour market reforms during the last economic crisis, in Chapter 3 we study the implications of labour market regulations in driving the sensitivity of an economy to fiscal spending shocks, in a Dynamic Stochastic General Equilibrium (DSGE) model with job search frictions. We demonstrate that less rigidity in the labour market reduces the impact of fiscal demand shock on job creation and employment, both at extensive and intensive margins, whereas higher rigidity amplifies it. We also establish that the extent to which government spending promotes economic activity, job creation and employment depends on the degree of substitutability between private and public consumption. Higher substitutability dampens economic activity and reduces the sizes of output and employment multipliers. Labour market-oriented fiscal spending is found to be the most potent policy instruments for promoting employment – especially in the presence of high labour market rigidities. Finally, in Chapter 4, we study how openness to international trade and capital mobility and their interactions with labour market policies affect the behaviour of an economy, in particular with respect to its unemployment level. We show that the degree of openness to international capital flow is crucial for understanding the response of unemployment to different shocks. In isolation, by raising the incentive to invest, a reduction in capital mobility barriers leads to lower unemployment, both in the long-run and the dynamic short-run. With limited restrictions to capital movement, unemployment responds faster and with greater magnitude to a domestic productivity shock, and this is further enhanced the more the economy is open to international trade. A striking finding of this study is that while a higher degree of capital mobility enhances the adjustment of unemployment in response to a domestic productivity shock, it dampens its adjustment to a foreign demand shock. By contrast, higher openness to international trade enhances the adjustment effects of both shocks on unemployment. Finally, we find that heterogeneity in the welfare state systems in the EU can generate substantial differentials in the adjustment of unemployment to various shocks.

This thesis uses a macroeconomic approach to study labour adjustments following sector-specific shocks. I develop a general model, investigate its dynamic adjustment process and apply it to study the Canadian economy in 2002–2006. This episode is an interesting case study because it features a significant labour reallocation to the resource sector and away from manufacturing, precipitated by an increase in global commodity prices and an associated exchange rate appreciation. The results establish that impediments to the adjustment process are economically significant in the aggregate for this episode, imposing costs of up to three percent of output during the transition. These findings augment several studies that suggest individual workers can face large and persistent earnings losses during job turnover. However, unlike previous research, I use the search and matching approach — which incorporates explicit labour market frictions — to uncover the sources of these costs for the macroeconomy. The findings emphasize that job loss itself is not particularly important quantitatively, but rather the non-transferability of skills during job turnover is a key concern. Finally, I investigate how labour market policy impacts the economy’s response to sector-specific shocks by analyzing a counterfactual policy change in unemployment benefits and improved skill acquisition through faster learning and training subsidies. The results reveal interesting policy trade-offs. First, I find that increasing unemployment benefits prolongs the economy’s adjustment, reduces employment, output and welfare and increases unemployment incidence and duration. However, because this policy impacts high-productivity and low-productivity sectors differently, it shifts the composition of the remaining jobs towards high-productivity sectors, thereby raising aggregate productivity and also reduces wage inequality. Second, I find that faster skill acquisition has the potential to deliver large economic gains in the long-run, but requires up-front investment costs which entail reduced economic performance in the short-run. / Thesis (Ph.D, Economics) -- Queen's University, 2008-08-05 23:44:39.827

This thesis is comprised of three chapters which discuss topics related to labor market dynamics from a macroeconomic perspective. Although each chapter is self-standing in terms of research question and methodology, they are united by a common interest for the macroeconomic implications of worker heterogeneity. The chapters vary with respect to the time horizon over which they study aggregate dynamics, covering business cycle frequency, the economy's long run steady state, and households' life cycle. Furthermore, they develop the concept of heterogeneity across different dimensions: stages of the life cycle, households' income and wealth, observed worker characteristics, and worker-firm productivity levels. The overall purpose of this thesis is therefore to contribute to the study of labor markets and labor policies through a multi-faceted approach.

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The choice of an appropriate government policy tool to promote the employment should be done with regard to the source of unemployment. This diploma the- sis investigates structural and cyclical components of unemployment. The two components are induced by different causes. Search and matching frictions in the labor market are the source of the structural component. The cyclical component is induced by a low labor productivity which induces a negative gross marginal profit of firms. Consequently, they are obliged to cancel a portion of existing job- worker matches. The main finding is that during a period of economic slowdown the overall unemployment and its cyclical component rise while the structural component declines. The dynamics of the two components is reversed during a robust economic growth. The diploma thesis proceeds with investigating the pub- lic hiring, a policy potentially suitable to diminish the unemployment during an economic slowdown. The results show that the public hiring can be successfully applied despite the private employment crowding out. A New Keynesian DSGE model calibrated for the Czech Republic is used to model the labor market dy- namics. The results are interpreted with regard to the historic development of the unemployment and the economic growth from 2000 to 2014. JEL...

Thesis advisor: Sanjay K. Chugh / Thesis advisor: Fabio Schiantarelli / My doctoral research focuses on the role of labor market frictions in shaping macroeconomic outcomes. I am currently pursuing three main lines of research that constitute the three chapters of this dissertation. The first chapter focuses on involuntary part-time employment as an additional margin used by firms to adjust to business cycle fluctuations. The chapter documents empirical regularities of involuntary part-time employment in the U.S. and furnishes a tractable analytical framework for studying this phenomenon that has gained so much attention in the years that followed the Great Recession. In the second chapter, which is joint work with Sanjay Chugh, Ryan Chahrour and Alan Finkelstein-Shapiro, we study the labor market wedge in the context of a search and matching model to understand how static and dynamic inefficiencies change over the business cycle. Measuring the labor market wedge and understanding its sources of movement is of great importance from a macroeconomic point of view, as existing research shows it holds a prominent place in explaining fluctuations in aggregate output. Finally, in the third chapter I study empirically the determinants of the job finding probability, a key object in the context of frictional labor markets. More specifically, I analyze how decisions on time allocation by the unemployed affect their chances of finding a job, and identify the activities that make more likely for an unemployed individual to receive and accept a job offer. Chapter 1. In recent years researchers and policymakers have shown renewed interest in involuntary part-time employment as a crucial indicator of labor market health. The fact that individuals have part-time jobs even though they would be willing to work more hours is evidence that resources in the economy are not employed at full capacity. This group represents almost 40 percent of total underemployment. Despite its large size and importance to policy-makers, surprisingly little literature addresses the empirical regularities or economic role this margin plays in determining labor market outcomes. In "Underemployment and the Business Cycle" I address several questions regarding involuntary part-time employment. First, how does involuntary part-time employment differ from the standard extensive and intensive margins? Second, what factors influence the choice of firms to use involuntary part-time workers? Third, how might economic policy contribute to the existence of involuntary part-time employment in the economy? And, fourth, have there been any changes over time in the response of involuntary part-time employment to changes in aggregate economic conditions and, if so, what explains them? To describe the empirical regularities of involuntary part-time employment, I use detailed micro-level data from longitudinally-linked monthly files of the Current Population Survey. A novel finding that emerges from the analysis of this dataset is that wages of involuntary part-time workers display higher volatility and lower persistence than those of their full-time counterparts, thus indicating a higher degree of flexibility. In addition, I find that changes in involuntary part-time employment are mostly explained by reallocation of workers from full-time to part-time positions within the firm, which involves more than just a mere reduction in hours worked. I then aggregate the data and compute business cycle statistics. Surprisingly, I find that the behavior of involuntary part-time employment resembles the behavior of unemployment more than the one of full-time employment. In fact, the results indicate that involuntary part-time employment is very volatile and strongly countercyclical. To understand the evidence I find at the micro and macro levels, I build an augmented search and matching model of the labor market featuring full-time and part-time employment, and a production function that combines both types of workers. The decision of whether a worker is full-time or part-time is made entirely by the firm, depending on the realizations of both aggregate and idiosyncratic productivity processes. The model is able to deliver the countercyclicality of involuntary part-time employment found in the data. The key mechanism to obtain this result is the relatively higher flexibility of part-time contracts that makes it more profitable for the firm to reallocate workers from full-time to part-time arrangements during recessions. Based on the model that captures key empirical facts, I conduct policy analysis to evaluate the effect of an increase in the cost of health insurance on involuntary part-time employment. The policy experiment predicts that an increase in the cost of health insurance provided by the firm to its full-time workers, such that their share in average full-time wages goes up by 1 percentage point, leads to an increase of steady state involuntary part-time employment by 10 percent, which nowadays would be equivalent to half a million additional involuntary part-time workers. I find evidence that involuntary part-time employment has become more volatile and persistent in the last 25 years. I study the impact that innovation in workforce management practices, a process that started in the 1990s and that has increased the degree of substitutability between full-time and part-time workers, may have had in changing the response over time of involuntary part-time employment to business cycle fluctuations. Impulse response analysis from the model indicates that an increase in the degree of substitutability makes involuntary part-time employment more sensitive to aggregate productivity shocks. Chapter 2. In "The Labor Wedge: A Search and Matching Perspective" we define and quantify static and dynamic labor market wedges in a search and matching model with endogenous labor force participation. Existing literature has generally centered on Walrasian labor markets in characterizing the inefficiencies, or ``gaps'', between labor demand and labor supply. However, given the conventional view in the profession that the matching process plays an important role in the labor market, the neoclassically-measured labor wedge suffers from a misspecification problem as it ignores the role of long-lasting relationships in explaining the cyclical pattern of the labor wedge. To construct the wedge we use a rigorously defined transformation function of the economy, which contains both the matching technology and the neoclassical production technology. Both technologies are primitives of the economy in the sense that a Social Planner must respect both processes. Given the model-appropriate transformation frontier and the household's static and dynamic marginal rates of substitution, we use data on the labor force participation rate, the employment rate, the vacancy rate, real consumption, real government spending, and real GDP to construct static and dynamic labor wedges. We find that, in a version of the model where all employment relationships turn over every period, the static labor wedge is countercyclical, a result that is consistent with existing literature. Once we consider long-lasting employment relationships, we can measure both static and dynamic wedges separately. We then find that, while the static wedge continues to be countercyclical, the dynamic (or intertemporal) wedge is procyclical. Since the latter is associated with the vacancy-posting decision of the firm, this result suggests that understanding the behavior of labor demand may be crucial to explaining the dynamic wedge. Our focus so far has been on obtaining a quantitative measure of both the static and dynamic wedges, and on analyzing their business cycle properties. Now we are working on extending this framework to provide a micro-founded explanation of the forces that could be driving the cyclical movements of the wedges. Chapter 3. Recent research has found that individuals who become unemployed allocate most of their forgone working hours into leisure rather than increasing the time devoted to job search activities. What is the rationale behind this decision? There are many factors that may affect the job search behavior of the unemployed. However, in this study I focus on a particular channel: the decision on how unemployed individuals allocate their time could be biased towards activities that increase their probability of finding a job. They might find more valuable to increase their social activities rather than looking formally for a job because this enhances their network, which could increase their chances of finding a job, even with less search effort. In "The Time Use Decisions of the Unemployed: A Survival Analysis", I conduct a duration analysis to estimate the effect of different time use allocations on the unemployment hazard rate using time use data from the Survey of Unemployed Workers in New Jersey. Defining "finding a job" as a failure, I estimate a single-spell, discrete-time duration model of unemployment with time-varying covariates using semi-parametric techniques. Given that I work with interval-censored data, I conduct the analysis using discrete time survival analysis techniques. The results indicate that education/training activities have a significant and positive impact on the hazard rate, i.e. they increase the probability that an unemployed worker finds a job, while leisure has the opposite effect. Furthermore, neither job-search nor networking have a significant effect on the hazard rate in the baseline specification. However, this result changes when incorporating into the regression interaction terms of these variables with a dummy that takes the value one if the individual is a long-term unemployed and zero otherwise. In this case, the coefficient associated with networking becomes positive and significant, while the coefficient of the interaction term is negative. This implies that networking has a positive effect on the hazard rate for short unemployment spells, but this effect weakens if the individual has been unemployed for a longer period. On the other hand, even after incorporating the interaction term, job search remains insignificant. These findings shed light on why individuals may not want to devote additional time to formal job search: it does not pay off with a higher likelihood of receiving a job offer, regardless of the length of the unemployment spell. On the other hand, other activities, such as investing in education or networking, are positively related to the probability of finding a job -- at least for short unemployment spells -- and thus it makes more sense for these individuals to devote more time to them.

This dissertation consists of three chapters that aim to build a framework which can be used to study interactions between the labour market and macroeconomic dynamics. To achieve this, we reformulate a standard New Keynesian dynamic stochastic general equilibrium (DSGE) model to include search and matching frictions in the labour market and heterogeneity in price and wage stickiness. The first chapter, coauthored with Professor Engin Kara, builds a real business cycle model with labour search frictions and heterogeneity in wage stickiness. Shimer’s (2005) critique on labour search models, that it cannot explain observed unemployment movements, reignited a long-standing debate on unemployment fluctuations and wage determination. Gertler and Trigari (2009) introduce wage stickiness to the model to match unemployment volatility, while Pissarides (2009) finds this modification not satisfactory, citing evidence on high wage cyclicality. We find heterogeneity in wage stickiness in microdata on wages. Our model, which reflects this heterogeneity, matches the data better than its one sector alternatives. The second chapter, coauthored with Professor Engin Kara, studies output dynamics in New Keynesian models with the standard labour market and heterogeneity in price stickiness. We analytically and numerically show that these models can reproduce a hump-shaped output response to persistent monetary shocks, which is a key feature of monetary transmission mechanism. The version of models without heterogeneity cannot generate a hump. Flexible prices in models with heterogeneity play a crucial role, by generating inertia to price-setting and output. The third chapter studies how the labour search frictions affect output dynamics in New Keynesian models, when combined with heterogeneity in nominal rigidities. Long-term employment relationship, that arises under search and matching framework, makes marginal costs history dependent. We show that this history dependence generates inertia in the model. Heterogeneity in nominal rigidities significantly reinforces this inertia, resulting in a hump-shaped output response to persistent monetary shocks. The model without the search frictions cannot replicate a hump even when monetary shocks are persistent, when wages are sticky.

Les effets de la sévère crise économique qui a suivi la crise financière en 2007-2008 s’est fait fortement ressentir sur le marché du travail. La croissance du chômage et l’insécurité de l’emploi ont considérablement influencé le pro­cessus de négociation salariale entre employeurs, employés et syndicats. Cette évolution a mis en avant la nécessité de comprendre à quel point ce processus ainsi que le rapport de force entre les parties en présence diffèrent en période de croissance et en période de ralentissement économique. A.n de répondre à cette question, la présente thèse étudie le comportement des employeurs, des employés et des syndicats lors du processus de fixation des salaires, en mettant partic­ulièrement l’accent sur l’évolution de l’interaction entre ces trois agents à travers le cycle économique. Les deux premiers chapitres de ma thèse analysent les fluc­tuations du pouvoir des syndicats à travers le cycle et relient ces fluctuations aux fluctuations des salaires. Le premier chapitre propose un cadre théorique qui associe frictions d’appariement et syndicats et démontre que les rigidités salariales proviennent de façon endogène du comportement des syndicats. Le deuxième chapitre de ma thèse teste ces prédictions empiriquement, en utilisant un panel d’industries sur la période 1987-2000 aux États-Unis. Les résultats confirment l’hypothèse que les salaires sont moins corrélés au niveau de pro­ductivité lorsqu’ils sont négociés collectivement. L’intensification des propriétés contracycliques de la part salariale est au coeur du mécanisme. Le troisième chapitre propose un modèle avec affichage des salaires qui examine l’évolution du pouvoir de monopsone des entreprises à travers le cycle économique. Les conséquences en termes de dispersion des salaires sont étudiées. Le premier chapitre de ma thèse propose un modèle dynamique du marché du travail qui associe deux caractéristiques principales : frictions d’appariement et syndicats. A.n d’étudier comment les syndicats influencent la volatilité des salaires à travers le cycle, je dissocie les deux composants de la volatilité des salaires : la volatilité du surplus total et la volatilité du pouvoir de négocia­tion effectif des syndicats. Le pouvoir de négociation effectif des syndicats est dé.ni comme la part du surplus total alloué aux travailleurs. Je prouve que ce pouvoir de négociation effectif est endogène et contracyclique, résultat qui provient directement de la fonction d’utilité des syndicats. L’intuition est la suivante. Du fait que les syndicats internalisent la relation entre le niveau des salaires et la création de postes, ils font face à un arbitrage entre le niveau des salaires et le niveau de l’emploi. Ainsi, les préférences des syndicats (donnant la priorité aux salaires ou à l’emploi) fluctuent à travers le cycle, et il en est de même du pouvoir de négociation effectif des syndicats. Il en résulte que, lorsque l’économie est touchée par un choc de productivité, la dynamique du pouvoir de négociation effectif des syndicats neutralise partiellement la dynamique du surplus total, mécanisme qui crée de la rigidité salariale. Le modèle est carac­térisé par la coexistence d’un secteur non syndiqué, dans lequel les salaires sont individuellement négociés à la Nash, avec un secteur syndiqué. En calibrant ce modèle avec des données américaines, j’obtiens qu’un choc positif entraine, au moment du choc, une compression de la prime syndicale, suivi par une aug­mentation régulière de cette prime à mesure que la proportion de travailleurs employés augmente. En corollaire, l’emploi réagit plus fortement lorsque les salaires sont négociés collectivement, mais l’effet est moins persistent. / The consequences of the sudden and severe contraction of industrial output in the aftermath of the .nancial crisis of 2007-2008 are increasingly being felt in the labor market. Rising unemployment and job insecurity has greatly in­.uenced wage bargaining interactions between firms, workers and trade unions. It pointed out the necessity to understand how di.erent were the wage-setting process and the balance of power between the main actors in good times and bad. As an answer to this issue, this dissertation investigates the wage-setting behavior of .rms, workers and trade unions, placing particular emphasis on how the interaction between these three economic agents changes over the business cycle. The two first chapters of the thesis analyze the fluctuations of the power of trade unions over the cycle, and relate these .uctuations to the .uctuations of wages. The .rst chapter proposes a theoretical framework with search and matching frictions and trade unions and shows how wage rigidity arises endoge­nously due to the behavior of unions. The second chapter tests these predictions empirically, using a panel of U.S. industries over the period 1987-2000. The re­sults confirm the predictions that wages are less correlated with productivity when collectively bargained. The intensi.cation of the countercyclicality of the labor share is at the core of the mechanism. The third chapter proposes a model with wage posting and investigates how them onopsonistic power of firmse volves along the cycle. The consequences in terms of wage dispersion are examined. The .rst chapter of the dissertation proposes a dynamic model of the labor marketwhichintegratestwomainfeatures: matchingfrictionsandtradeunions. To examine how trade unions shape the volatility of wages over the business cycle, I decompose the volatility of wages into two components: the volatil­ity of the match surplus and the volatility of the e.ective bargaining power. Formally, I de.ne the e.ective bargaining power of the union as the share of the total surplus allocated to the workers. Starting from the union’s objective function, I prove that its e.ective bargaining power is endogenous and coun­tercyclical. Intuitively, because the union internalizes the relationship between the wage level and the job creation, it faces a trade-o. between the wage rate and the employment rate. Therefore, the union’s preferences (wage-oriented or employment-oriented) fluctuate along the cycle and so does its effective bargain­ing power. As a result, when the economy is hit by a productivity shock, the dynamics of the union’s effective bargaining power partially counteract the dy­namics of the total surplus and this mechanism delivers wage rigidity. I specify a model in which a non unionized sector, where wages are negotiated through a standard individual Nash bargaining, coexists with a unionized sector. In the model calibrated with U.S. data, I .nd that a positive productivity shock leads, on impact, to a compression of the union wage premium, followed by a steady increase of this premium as the proportion of employed workers in the trade unions increases. Relatedly, employment reacts stronger when wages are collectively bargained, but its pattern features less persistence.

This dissertation studies various issues related to regime switching and DSGE models. The methods developed are used to study U.S. business cycles. Chapter one considers and derives the limit distributions of likelihood ratio based tests for Markov regime switching in multiple parameters in the context of a general class of nonlinear models. The analysis simultaneously addresses three difficulties: (1) some nuisance parameters are unidentified under the null hypothesis, (2) the null hypothesis yields a local optimum, and (3) the conditional regime probabilities follow stochastic processes that can only be represented recursively. When applied to US quarterly real GDP growth rates, the tests suggest strong evidence favoring the regime switching specification over a range of sample periods. Chapter two develops a modified likelihood ratio (MLR) test to detect regime switching in state space models. I apply the filtering algorithm introduced in Gordon and Smith (1988) to construct a modified likelihood function under the alternative hypothesis of two regimes and I extend the analysis in Chapter one to establish the asymptotic distribution of the MLR statistic under the null hypothesis of a single regime. I also apply the test to a simple model of the U.S. unemployment rate. This contribution is the first to develop a test based on the likelihood ratio principle to detect regime switching in state space models. The final chapter estimates a search and matching model of the aggregate labor market with sticky price and staggered wage negotiation. It starts with a partial equilibrium search and matching model and expands into a general equilibrium model with sticky price and staggered wage. I study the quantitative implications of the model. The results show that (1) the price stickiness and staggered wage structure are quantitatively important for the search and matching model of the aggregate labor market; (2) relatively high outside option payments to the workers, such as unemployment insurance payments, are needed to match the data; and (3) workers have lower bargaining power relative to firms, which contrasts with the assumption in the literature that workers and firms share equally the surplus generated from their employment relationship.

The main research question of this dissertation is whether factors other than labor productivity can help to explain short-run fluctuations and medium-run trends in unemployment in Austria respectively Western Continental Europe. In the part on analyzing short-term-fluctuations I will set up a New Keynesian DSGE model with a richly specified labor market. This model will be used to compare how different labor market specifications fit to Austrian quarterly data. Most importantly, the Bayesian model comparison indicates an important role for nominal wage rigidities and for a timely response of employment to changes in vacancies. Furthermore, models with consensual determination of working hours ('efficient bargaining') tend to perform relatively well. The best model can reproduce the relative volatility of labor market tightness compared to labor productivity comparatively well. Moreover, shock decompositions show that fluctuations in Austrian labor market tightness are mainly driven by demand shocks and to a much smaller extent by productivity shocks. In the part on explaining medium-term-trends in unemployment I will set up a theoretical model and demonstrate that certain stylized facts can also be generated by an increase in international trade (and not only by skill-biased technological change). Furthermore I will show that a differential response of different industrial economies ('US' versus 'Continental Europe') might be due to characteristics of sectors which are not directly exposed to globalization.