Unemployment, Capital and Hours: On the quantitative performance of a DSGE labor market model

This paper shows that the standard Mortensen-Pissarides framework embedded in a RBC macroeconomic model with risk averse agents, capital and a labor-leisure choice has the ability to match all moments of the actual US-unemployment rate and other labor market variables within tight bounds when estimated on aggregate output alone. It correctly predicts around 90% of the variation on business-cycle frequency. We describe the set of parameter values that generate these results and show that they lie in the space of commonly estimated or calibrated values in macroeconomic DSGE models. In addition we show that some wage setting arrangements like right to manage approaches typically employed in the literature will be unable to generate the observed ∞uctuations in unemployment rates and give the reason for their failure. JEL Classiflcation System: E30,E24,J64