Force of Invisible Hand, Labor, and Just Price: Basic Principles of Sorting and Matching Under Wage and Price Dispersion

If the consumer realistically evaluates the efficiency of his efforts on labor and search, the purchase any quantity demanded will be optimal. Under equilibrium price dispersion suboptimal satisfying purchases represent corner solutions. A buyer who does not claim the optimal purchase either leaves the market or buys optimally. The invisible hand stops the buyer’s search in time and at the place where and when the purchase price allocates his time optimally between labor, search, and leisure and thereby maximizes the utility of his consumption-leisure choice. The producer does not know how much time the consumer has spent on search and what is his willingness to pay. But it is enough for him to know the quantity demanded in order to accurately determine not only the price but also the meeting point. His working time is divided between the actual production and services, for example, the delivery of goods, which saves the consumer's leisure time. A virtual frontier of production possibilities arises where the manufacturer optimally sells goods and leisure to the consumer. Any point on the frontier represents the trade-off between the time spent on search by the consumer and the time spent by producer on the delivery. Sorting sellers and buyers by their industry and diligence, local markets segment the production opportunity frontier. The force of the invisible hand, i.e., the rate of mutual interest, is increasing with seller’s productivity and buyer’s wage rate. The matching occurs at the just price level, which provides the market equilibrium. This price optimizes the distribution of the buyer's time between labor, search, and leisure, and the seller’s time between production and delivery; it equates the producer’s marginal costs with his average cost and maximizes the buyer's consumption-leisure utility. In every local market, a just price also equates the seller’s markup with the actual buyer’s purchasing power. The concept of just price proposed in this article is consistent with both the theory of marginal utility and the labor theory of value.The transformation of producer’s time into consumer’s leisure time discovers the rate of their mutual interest or their gravitation, where its force is directly proportional to the product of quantity supplied and quantity demanded, and inversely proportional to the product of times the parties to the transaction have spent on it.

The Weak Job Recovery in a Macro Model of Search and Recruiting Intensity

We show that cyclical fluctuations in search and recruiting intensity are quantitatively important for explaining the weak job recovery from the Great Recession. We demonstrate this result using an estimated labor search model that features endogenous search and recruiting intensity. Since the textbook model with free entry implies constant recruiting intensity, we introduce a cost of vacancy creation, so that firms respond to aggregate shocks by adjusting both vacancies and recruiting intensity. Fluctuations in search and recruiting intensity driven by shocks to productivity and the discount factor help bridge the gap between the actual and model-predicted job-filling rate. (JEL E24, E32, J41, J63, J64)

Informality, Frictions, and Macroprudential Policy

We analyze the effects of macroprudential policies through the lens of an estimated dynamic stochastic general equilibrium (DSGE) model tailored to developing markets. In particular, we explicitly introduce informality in the labor and goods markets within a small open economy embedding financial frictions, nominal and real rigidities, labor search and matching, and an explicit banking sector. We use the estimated version of the model to run welfare analysis under optimized monetary and macroprudential rules. Results show that although informality reduces the efficiency of macroprudential policies following a convex fashion, combining the latter with an inflation targeting objective could be beneficial.

The Intensity of Job Search and Search Duration

We use online job application data to study the relationship between search intensity and search duration. The data allow us to control for job seeker composition and the evolution of available job openings over the duration of search. We find that, within an individual search spell, search intensity declines continuously. We also find that longer-duration job seekers search more intensely throughout their search. They tend to be older, male, nonemployed, and live in areas with weaker labor markets. Our findings contradict standard assumptions of labor search models. We discuss how to reconcile the theory with our evidence. (JEL E24, J24, J63, J64)

Labor market sorting and health insurance system design

This paper develops and estimates a life‐cycle equilibrium labor search model in which heterogeneous firms determine health insurance provisions and heterogeneous workers sort themselves into jobs with different compensation packages over the life cycle. I study the optimal joint design of major policies in the Affordable Care Act (ACA) and the implications of targeting these policies to certain individuals. Compared with the health insurance system under the ACA, the optimal structure lowers the tax benefit of employer‐sponsored health insurance and makes individual insurance more attractive to younger workers. Through changes in firms' insurance provisions, a greater number of younger workers sort into individual markets, which contributes to improving the risk pool in individual insurance and lowering the uninsured risk.