We develop an estimator and tests of a discrete time mixed proportional hazard (MPH) model of duration with unobserved heterogeneity. We allow for competing risks, observable characteristics, and censoring, and we use linear GMM, making estimation and inference straightforward. With repeated spell data, our estimator is consistent and robust to the unknown shape of the frailty distribution. We apply our estimator to the duration of price spells in weekly store data from IRI. We find substantial unobserved heterogeneity, accounting for a large fraction of the decrease in the Kaplan-Meier hazard with elapsed duration. Still, we show that the estimated baseline hazard rate is decreasing and a homogeneous firm model can accurately capture the response of the economy to a monetary policy shock even if there is significant strategic complementarity in pricing. Using competing risks and spell-specific observable characteristics, we separately estimate the model for regular and temporary price changes and find that the MPH structure describes regular price changes better than temporary ones.

We develop a random search model with two-sided heterogeneity and match-specific productivity shocks to explain why high-productivity workers tend to work at high-productivity firms despite low-productivity workers gaining about as much from such matches. Our model has two key predictions: i) the average log wage that a worker receives is increasing in the worker's and employer's productivity, with low-productivity workers gaining proportionally more at high-productivity firms and ii) there is assortative matching between a worker's productivity and that of her employer. Selective job acceptance drives these patterns. All workers are equally likely to meet all firms, but workers have higher surplus from meeting firms of similar productivity. The high surplus meetings result in matches more frequently, generating assortative matching. Only the subset of meetings that result in matches are observed in administrative wage data, shaping wages. We show that our findings are quantitatively consistent with recent empirical results. Moreover, we prove this selection is not detected using standard empirical approaches, highlighting the importance of theory-guided empirical work. Our results imply that encouraging high-wage firms to hire low-wage workers may be less effective at reducing wage inequality than wage patterns suggest. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

We propose a new matching algorithm -- Unpaired kidney exchange -- to tackle the problem of double coincidence of wants without using money. The fundamental idea is that "memory" can serve as a medium of exchange. In a dynamic matching model with heterogeneous agents, we prove that average waiting time under the Unpaired algorithm is close to optimal, substantially less than the standard pairwise and chain exchange algorithms. We evaluate this algorithm using a rich dataset of kidney patients in France. Counterfactual simulations show that the Unpaired algorithm can match 57% of the patients, with an average waiting time of 440 days (state-of-the-art algorithms match about 34% with an average waiting time of 695 days). The optimal algorithm, which is practically infeasible, performs only slightly better: it matches 58% of the patients and leads to an average waiting time of 426 days. The Unpaired algorithm confronts two incentive-related practical challenges. We address those challenges via a modified version of the Unpaired algorithm that employs kidneys from the deceased donors waiting list. It can match 86% of the patients, while reducing the average waiting time to about 155 days.

This paper examines the impact of unions on unemployment and wages in a dynamic equilibrium search model. We model a union as imposing a minimum wage and rationing jobs to ensure that the union's most senior members are employed. This generates rest unemployment, where following a downturn in their labor market, unionized workers are willing to wait for jobs to reappear rather than search for a new labor market. We characterize the hazard rate of exiting unemployment, and show that it is low at long durations whenever the union-imposed minimum wage high; we establish that a high union-imposed minimum wage generates a compressed wage distribution and a high turnover rate of jobs - properties consistent with the data. Finally, we show that seniority rules lead to lower unemployment levels, relative to an alternative rule allocating jobs workers randomly.

We develop an economic model of transitions in and out of employment. Heterogeneous workers switch employment status when the net benefit from working, a Brownian motion with drift, hits optimally chosen barriers. This implies that the duration of jobless spells for each worker has an inverse Gaussian distribution. We allow for arbitrary heterogeneity across workers and prove that the distribution of inverse Gaussian distributions is partially identified from the duration of two non-employment spells for each worker. We estimate the model using Austrian social security data and find that dynamic selection is a critical source of duration dependence.

We study a model of over-the-counter trading in which ex ante identical traders invest in a contact technology and participate in bilateral trade. We show that a rich market structure emerges both in equilibrium and in an optimal allocation. There is continuous heterogeneity in market access under weak regularity conditions. If the cost per contact is constant, heterogeneity is governed by a power law and there are middlemen, market participants with unboundedly high contact rates who account for a positive fraction of meetings. Externalities lead to overinvestment in equilibrium, and policies that reduce investment in the contact technology can improve welfare. We relate our findings to important features of real-world trading networks.

In this provocative paper, Hall and Kudlyak show that during a typical recession in the United States from 1949 to 2019, a short-lived burst of job loss explains much of the rapid increase in the unemployment rate. During the subsequent expansion, unemployment declines comparatively slowly and steadily, primarily due to a sharp and persistent decline in the job finding rate, both for the initial group of job losers and for other workers who became unemployed only later in the business cycle. Hall and Kudlyak argue that the elevated jobless rate for the latter group is evidence that unemployment is “contagious” or “infectious.” For the most part, I will not take issue with their facts, although I will make the (well-known) observation that the 2020 pandemic recession and subsequent expansion featured the fastest increase in unemployment on record, followed by the fastest decrease on record. While this recession was different in many ways from past ones, the fact that unemployment fell so quickly during the early stages of this expansion may be useful for diagnosing why unemployment declined so slowly during prior expansions.

We develop a quantitative framework for exploring how individuals trade off the utility benefit of social activity against the internal and external health risks that come with social interactions during a pandemic. We calibrate the model to external targets and then compare its predictions with daily data on social activity, fatalities, and the estimated effective reproduction number R(t) from the COVID-19 pandemic in 2020. While the laissez-faire equilibrium is consistent with much of the decline in social activity in March in the US before any formal stay-at-home orders, optimal policy further imposes immediate and highly persistent social distancing. The expected cost of COVID-19 in the US is substantial, $12,700 in the laissez-faire equilibrium and $8,100 per person under an optimal policy. Optimal policy generates this large welfare gain by shifting the composition of costs from fatalities to persistent social distancing that largely suppresses the outbreak.

We study pairwise trading mechanisms in the presence of one-sided or two-sided private information and two-sided limited commitment, whereby either trader can walk away from a proposed trade when he learns the trading price. We show that when one trader's information is relevant for the other trader's value of the asset, optimal trading arrangements may necessarily conceal the traders' information. While limited commitment itself may not be costly, it shapes how prices transmit information.

We consider asset markets where quality is heterogeneous and buyers have different ability to evaluate quality. In particular, we allow sellers to set up markets indexed by asking prices and buyers direct their search into different markets. We construct an equilibrium that features pooling on the sellers' side and separation on the buyers' side. A buyer without expertise in asset evaluation will search in a high-price market that contains more good assets. On the other hand, a buyer with expertise will search in a low-price market. The low-price market will be polluted with more bad assets, but the buyer can use his expertise to pick out the good assets and reject the bad ones. In equilibrium, the probability for a seller to meet a buyer decreases in asking price, and sellers with a bad asset are further rationed due to rejections by expert buyers. The model predicts that a larger share of bad assets is associated with a worsening of asset liquidity and an exacerbation of price dispersion.

This paper explores price formation when sellers are privately informed about their preferences and the quality of their asset. There are many equilibria, including a semi-separating one in which each seller's price depends on a one-dimensional index of her preferences and asset quality. This multiplicity does not rely on off-the-equilibrium path beliefs and so is not amenable to standard signaling game refinements. The semi-separating equilibrium may not be Pareto efficient, even if it is not Pareto dominated by any other equilibrium. Instead, efficient allocations may require transfers across uninformed buyers, inconsistent with any equilibrium. (JEL D11, D52, D82)

We develop a new approach to measuring the correlation between the types of matched workers and firms. Our approach accurately measures the correlation in data sets with many workers and firms, but a small number of independent observations for each. Using administrative data from Austria, we find that the correlation between worker and firm types lies between 0.4 and 0.6. We use artificial data sets with correlated worker and firm types to show that our estimator is accurate. In contrast, the Abowd, Kramarz and Margolis (1999) fixed effects estimator suggests no correlation between types in our data set. We show both theoretically and empirically that this reflects an incidental parameter problem.

Previous articleNext article No AccessThe Past, Present, and Future of Economics: A Celebration of the 125-Year Anniversary of the JPE and of Chicago EconomicsLabor MarketsRobert ShimerRobert ShimerUniversity of Chicago Search for more articles by this author PDFPDF PLUSFull Text Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Volume 125, Number 6December 2017 Article DOIhttps://doi.org/10.1086/694637 Views: 1906Total views on this site © 2017 by The University of Chicago. All rights reserved.PDF download Crossref reports no articles citing this article.

What market structure emerges when market participants can choose the rate at which they contact others? We show that traders who choose a higher contact rate emerge as intermediaries, earning profits by taking asset positions that are misaligned with their preferences. Some of them, middlemen, are in constant contact with other traders and so pass on their position immediately. As search costs vanish, traders still make dispersed investments and trade occurs in intermediation chains, so the economy does not converge to a centralized market. When search costs are a differentiable function of the contact rate, the endogenous distribution of contact rates has no mass points. When the function is weakly convex, faster traders are misaligned more frequently than slower traders. When the function is linear, the contact rate distribution has a Pareto tail with parameter 2 and middlemen emerge endogenously. These features arise not only in the (inefficient) equilibrium allocation, but also in the optimal allocation. Moreover, we show that intermediation is key to the emergence of the rest of the properties of this market structure.

We study decentralized trading networks where agents differ in both their time-varying taste for an asset and the constant frequency at which they meet others. We show that fast agents can endogenously arise as intermediators whose net valuation of an asset gets moderated through their exposure to others. We show that allocating meetings in an ex-ante asymmetric fashion across agents generates higher welfare then a homogeneous distribution of meeting frequencies, only if some agents intermediate. We also characterize properties of the market equilibrium in which ex-ante identical agents choose their meeting rates, and compare the allocation with the planner allocation.

We use labor market data and data on price changes to examine the role of structural duration dependence and heterogeneity in shaping the aggregate hazard rates. In contrast to our companion paper, we examine this question through the lens of an accelerated failure time model, rather than a proportional hazard model. We focus on environments where we observe two observations per individual. We use a well-known lemma by Kotlarski (1967) to prove that the accelerated failure time model is nonparametrically identified. We also establish that the model is overidentified. In particular, we prove that the accelerated failure time model imposes restrictions on the two-sided Laplace transformation of the joint density of two spells. We intend to examine this restriction and, if possible, estimate the model using data on the timing of price changes and on the duration of employment and non-employment spells.

We use labor market data and data on price changes to examine the role of structural duration dependence and heterogeneity in shaping the aggregate hazard rates. In line with an extensive literature we examine this question through the lens of a mixed proportional hazard model. While we think that this model is a convenient representation of the data, we recognize that its structure can be too restrictive. We focus on environments where we observe two observations per individual as this not only allows us to estimate the model non-parametrically, but also test whether the true data-generating process is likely to have a structure imposed by a mixed proportional hazard model. We reject that this is the case both for the price change data and labor market data. We then turn to data simulated from reasonable structural models, none of which can be represented as a mixed proportional hazard model, to examine implications of estimating a misspecified mixed proportional hazard model. We use a ``CalvoPlus'' model for price changes, while for the labor market data, we assume that individual durations follow an inverse Gaussian distribution. We find that, in fact, the mixed proportional hazard model is a good approximation of the CalvoPlus model and therefore the estimated baseline hazard rate is very similar to the true structural hazard rate. This is not the case for the inverse Gaussian model for the labor market where the mixed proportional hazard model cannot be viewed as a good approximation. As a consequence, fitting a mixed proportional hazard model to these data vastly understate the importance of heterogeneity in the economy.

In reality, many other markets are characterized by a small amount of search frictions, yet time variation in gross flows and real economic activity are less pronounced than in the labor and housing markets. This paper asks why? Preliminary evidence suggests that heterogeneity amongst workers and houses is key. It is important both for understanding why search frictions exist and for understanding why wage and price adjustment is sluggish. Markets for more homogeneous products are therefore expected to respond more efficiently to shocks.

This paper develops a model of unemployment fluctuations. The model keeps the architecture of the Barro and Grossman [1971] general disequilibrium model but replaces the disequilibrium framework on the labor and product markets by a matching framework. On the product and labor markets, both price and tightness adjust to equalize supply and demand. There is one more variable than equilibrium condition on each market, so we consider various price mechanisms to close the model, from completely flexible to completely rigid. With some price rigidity, aggregate demand influences unemployment through a simple mechanism: higher aggregate demand raises the probability that firms find customers, which reduces idle time for firms’ employees and thus increases labor demand, which in turn reduces unemployment. We use the comparative-statics predictions of the model together with empirical measures of quantities and tightnesses to re-examine the origins of labor market fluctuations. We conclude that (1) price and real wage are not fully flexible because product and labor market tightness fluctuate significantly; (2) fluctuations are mostly caused by labor demand and not labor supply shocks because employment is positively correlated with labor market tightness; and (3) labor demand shocks mostly reflect aggregate demand and not technology shocks because output is positively correlated with product market tightness. Pascal Michaillat Department of Economics London School of Economics Houghton Street London, WC2A 2AE United Kingdom p.michaillat@lse.ac.uk Emmanuel Saez Department of Economics University of California, Berkeley 530 Evans Hall #3880 Berkeley, CA 94720 and NBER saez@econ.berkeley.edu