This series of essays studies the observed fluctuations in the aggregate economy and the factors behind. I first examine the cyclical behaviors of the aggregate productivity shocks, as measured by the aggregate Solow residual and how it relates to the technology adoption decision done by individual firms. Then I divert my attention to the labor market, and enquire into (i) why workers with different skills show such significant differences as observed in the U.S. in terms of their unemployment rates and wages; and (ii) what the so-called labor wedge might reflect.
The first chapter of my dissertation formalizes Schumpeter's idea that the firm level technological changes are what cause changes in the aggregate Solow residual. The analysis starts with a characterization about how new firms make their technology adoption decision, taking into account both the average productivity of the candidate technology and the risk associated with its adoption. Then through the creative destruction process, these newly adopted technologies gradually prevail in the market, and eventually manifest themselves in the aggregate Solow residual. The quantitative experiments confirm that the Schumpeterian story told in this chapter is able to amplify the traditional aggregate productivity shock, as well as to transform other shocks to the economy into variations in the Solow residual, and thus generating significant business cycle fluctuations. The model also has a few reasonable firm-level implications.
The second chapter develops a framework for the study of the labor market dynamics when workers differ in their production efficiency, which I call skills in the chapter, and when there are search frictions. Compared to the standard business cycle model with frictional labor market, skill heterogeneity in my model creates dispersion in the match surpluses between the workers and the firms, and thus necessitates a screening process that results in the termination of the unprofitable matches in equilibrium. This endogenous separation mechanism disproportionately influences the employment status of the less-skilled workers and not only exposes them to larger layoff risks, but also inflicts on them greater difficulties in terms of reestablishing their employment relationship with the firms. Quantitatively, the model has cross-sectional implications for the unemployment rates and the wages that are consistent with the observed differences across skill groups in the U.S. labor market.
The last chapter carefully studies the hypothesis that the empirical labor wedge as defined by Robert Shimer may reflect the existence of a household production sector that is largely uncounted by the standard macroeconomic framework. By enriching an otherwise standard real business cycle model with a household production sector, I find that if the hours worked at home and the utility obtained from the home-produced goods are not included in the calculation, the model generates a wedge between the marginal product of labor (MPL) and the household's marginal rate of substitution between consumption and leisure (MRS) that assembles the empirical labor wedge. With reasonable parameter values, the quantitative properties of the model-predicted labor wedge also match those of their empirical counterpart.