Macroeconomic Search Model Calibration Wedge
RCTReview
Macroeconomic search and matching models require calibrating the non-work time opportunity parameter $z$, but structural literature yields opposing requirements—needing negative values to match wage dispersion versus near-unity values to match unemployment volatility over business cycles.
Picture this
Think of calibrating a complex balance scale where one group of theoretical economists insists the counterweight must weigh negative five pounds and another group insists it must weigh ten pounds; directly placing the counterweight on an empirical scale provides the definitive real-world weight needed to balance the equations.
What the evidence says
Directly measured opportunity cost yields $z = 0.72$ under monopsonistic labor market assumptions and $z = 0.87$ under Diamond-Mortensen-Pissarides assumptions, providing empirical validation for intermediate-to-high volatility calibrations while rejecting negative $z$ wage dispersion models.
- Who was studied
- N = 1,152 unemployed job applicants nationwide, calibrated alongside Current Population Survey (CPS) and Survey of Income and Program Participation (SIPP) data.
- How
- Structural empirical calibration integrating experimental marginal value of time estimates with labor market wedges, tax rates (20%), commuting time, UI benefit loss (6%), and childcare expenses (2.3%).
What to do
Calibrate business cycle search and matching models using an empirical parameter benchmark of $z = 0.72$ to $0.87$ rather than extreme theoretical tail values.
From the source
"Our preferred estimate after accounting for these additional costs is $z=0.72$ which is in the intermediate to higher range of values used in the search literature."
Labor_Supply_and_the_Value_of_Non_Work_Time_Experimental_Estimates.pdf