Working Paper

The cyclicality of the user cost of labor with search and matching

Abstract: The user cost of labor captures the hiring wage and the expected effect of the economic conditions at the time of hiring on future wages. In search and matching models, I show that it is the user cost and not the wage that is weighted against the worker's marginal product at the time of hiring; so, the user cost is the allocational variable. I construct its measure in the data and estimate that it is more procyclical than average wages or wages of newly hired workers. I show that the textbook search and matching model cannot simultaneously generate the empirical elasticities of the vacancy-unemployment ratio and of the user cost of labor, irrespectively of the surplus division rule.

Keywords: Business cycles; Labor market;

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Working Paper

Publication Date: 2011

Number: 09-12