The labor market: details matter
Glazova A.
The specific processes that shape the labor market and their impact on the macroeconomy continue to be of great interest from both a practical and theoretical perspective. However, a gap exists between the large number of models that study specific labor market processes within a partial equilibrium framework and the extremely limited number of large-scale macroeconomic models that take these mechanisms into account. The existence of such models helps us understand how the labor market influences processes not directly related to it, which is of great interest for macroeconomic policy. The desire to close this gap motivates this study. In this paper, I introduce labor market mechanisms known from partial equilibrium models, econometric studies using microdata, and research in psychology and sociology into an agent-based macroeconomic model. These mechanisms include the ability of workers to switch industries based on their skills, skill loss during unemployment, and the dependence of wages on skills. I show that when a single-period negative supply shock occurs, these difficulties prevent GDP from fully recovering, at least in the medium term: the GDP gap between the shock and no-shock scenarios persists even after five years, while no such difference is observed in the baseline model. I also show that this simulated shock has a stronger impact on industries with higher skill requirements. This occurs because the higher a firm’s skill requirements, the more difficult it is for it to find suitable workers and fill vacancies. A shortage of workers, in turn, leads to lower output. Finally, based on this, I demonstrate that targeted training programs of new workers in the hardest-hit industries are more beneficial than untargeted programs.