Stubborn Beliefs in Search Equilibrium / Guido Menzio.

Format:

Book

Author/Creator:

Menzio, Guido.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w29937.

NBER working paper series no. w29937

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

I study a search equilibrium model of the labor market in which workers have stubborn beliefs about their labor market prospects, i.e. beliefs about their probability of finding a job and the wage they will earn that do not respond to aggregate fluctuations in fundamentals. I show that, when workers have stubborn beliefs, the response of the wage bargained by a firm and a worker to aggregate shocks is dampened. As a result, the response of labor market tightness, job-finding probability, unemployment and vacancies to aggregate fluctuations is amplified. I show that stubborn beliefs generate cyclical inefficiencies in the labor market that can be corrected with countercyclical employment subsidies. I find that the response of the labor market to negative shocks is the same even if only a small fraction of workers has stubborn beliefs. In contrast, if the fraction of workers with stubborn beliefs is small, the response of the labor market to positive shocks is approximately the same as under rational expectations.

Notes:

Print version record

April 2022.