CIRJE-F-1084 "Employment and Hours over the Business Cycle in a Model with Search Frictions"
Author Name Kudoh, Noritaka, Hiroaki Miyamoto and Masaru Sasaki
Date April 2018
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Abstract

This paper studies a large-firm search-matching model with variable hours of work to investigate how firms utilize the intensive and extensive margins of labor adjustment over the business cycle. Introduction of variable hours of work introduces the Frisch elasticity parameter into the analysis, and this is a key determinant of the magnitude of fluctuations in hours of work. The model replicates the observed cyclical behavior of the Japanese labor market, in which fluctuations in hours of work account for 79 percent of the variations in total labor input, well. Total labor input in the model is as volatile as that in the data, and is 25 times as volatile as that in the model without the intensive margin.