Based on state-level labour market data from the Outgoing Rotation Group of the Current Population Survey from 1979 to 1997, discusses the wage and displacement effects of supply and demand shocks.

We use payroll data on over 1 million workers at 80,000 small firms to construct county-month measures of employment, hours, and wages that correct for dynamic changes in sample composition in response to business cycle fluctuations. We use this to estimate the response of small firms' employment, hours and wages following tighter local labor market conditions. We find that employment and hours per worker fall and wages rise. This is consistent with the predictions of the response to a demand shock in the well-known “jobs ladder” model of labor markets. To check this interpretation, we show our results hold when instrumenting for local demand using county-level Department of Defense contract spending. Correction for dynamic sample bias is important -- without it, the hours fall by only one third as much and wages increase by double.

This paper estimates how effects of shocks to local labor demand on local labor market outcomes vary with initial local economic conditions. The data are on U.S. metro areas from 1979 to 2011. The paper finds that demand shocks to local job growth have greater effects in reducing local unemployment rates if the local economy is initially depressed than if the local economy is booming. Demand shocks have greater effects on local wage rates if the local unemployment rate is initially low, but lesser effects if local job growth is initially high. These different effects of local demand shocks imply that social benefits of adding jobs are two to three times greater per job in more depressed local labor markets, compared to more booming local labor markets.

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-statistics 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.

We present a static model of aggregate demand and unemployment. The economy has a nonproduced good, a produced good, and labor. Product and labor markets have matching frictions. A general equilibrium is a set of prices, market tightnesses, and quantities such that buyers and sellers optimize given prices and tightnesses, and actual tightnesses equal posted tightnesses. In each frictional market, there is one more variable than equilibrium condition. To close the model, we take all prices as parameters. We obtain the following results: (1) unemployment and unsold production prevail in equilibrium; (2) each market can be slack, efficient, or tight if the price is too high, efficient, or too low; (3) product market tightness and sales are positively correlated under aggregate demand shocks but negatively correlated under aggregate supply shocks; (4) transfers from savers to spenders stimulate aggregate demand, product market tightness, and employment; (5) the government-purchase multiplier is positive when the economy is slack, zero when the economy is efficient, and negative when the economy is tight; (6) with unequal distribution of profits and labor income, a wage increase may stimulate aggregate demand and reduce unemployment.

We examine patterns of regional adjustments to shocks in the US during the past four decades. We find that the response of interstate migration to relative labor market conditions has decreased, while the role of the unemployment rate as absorber of regional shocks has increased. However, the response of net migration to regional shocks is stronger during aggregate downturns and increased particularly during the Great Recession. We offer a potential explanation for the cyclical pattern of migration response based on the variation in consumption risk sharing.

Labor Markets and Business Cycles integrates search and matching theory with the neoclassical growth model to better understand labor market outcomes. Robert Shimer shows analytically and quantitatively that rigid wages are important for explaining the volatile behavior of the unemployment rate in business cycles. The book focuses on the labor wedge that arises when the marginal rate of substitution between consumption and leisure does not equal the marginal product of labor. According to competitive models of the labor market, the labor wedge should be constant and equal to the labor income tax rate. But in U.S. data, the wedge is strongly countercyclical, making it seem as if recessions are periods when workers are dissuaded from working and firms are dissuaded from hiring because of an increase in the labor income tax rate. When job searches are time consuming and wages are flexible, search frictions--the cost of a job search--act like labor adjustment costs, further exacerbating inconsistencies between the competitive model and data. The book shows that wage rigidities can reconcile the search model with the data, providing a quantitatively more accurate depiction of labor markets, consumption, and investment dynamics. Developing detailed search and matching models, Labor Markets and Business Cycles will be the main reference for those interested in the intersection of labor market dynamics and business cycle research.