The Department of Economics Macroeconomics Workshop Series presents

"Heterogeneous Information and Labor Market Fluctuations
with Vaidyanathan Venkateswaran, UCLA  

Wednesday, May 11, 2011
11:30 a.m.-1:00 p.m.
Social Science Plaza B, Room 3266
Venkateswaran introduces dispersed information in a search and matching model of the labor market, where firms are hit by aggregate and idiosyncratic productivity shocks. The latter induce larger
responses in recruiting activity than the former - because aggregate shocks have general equilibrium effects which partially offset the change in fundamentals. Informational frictions prevent firms from disentangling aggregate and idiosyncratic shocks. With Bayesian updating, firms attribute aggregate shocks largely to idiosyncratic factors, because the latter have significantly larger variances. This misattribution translates into an increased responsiveness of employment to aggregate shocks, relative to an economy with full information. Venkateswaran shows that in a calibrated model, this channel has quantitatively significant effects and offers a potential solution to a well-known puzzle - the inability of standard search and matching models to generate sufficient volatility in labor market variables. In particular, the model with dispersed information brings the relative volatilities of employment and market tightness very close to those observed in the data.

For further information, please contact Gloria Simpson,

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