Business cycles in the equilibrium model of labor market search and self-insurance

Abstract

I introduce risk-aversion, labor-leisure choice, capital, individual productivity shocks, and market incompleteness to the standard model of labor search and matching and investigate the model's cyclical properties. I find that the model can generate the observed large volatility of unemployment and vacancies with a reasonable replacement rate of unemployment insurance benefits of 64%. Labor-leisure choice plays a crucial role through additional utility from leisure when unemployed and further amplification from adjustments of hours worked. On the other hand, the borrowing constraint or individual productivity shocks do not significantly affect the cyclical properties of unemployment and vacancies. © (2012) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.