Friday, March 21, 2014

Question of the day

Roger Farmer:

Why is this a big deal? Because 90% of the macro seminars I attend, at conferences and universities around the world,  still assume that the labor market is an auction where anyone can work as many hours as they want at the going wage.  Why do we let our students keep doing this?
A model is a tool for better understanding the world.  While there may be problems where this particular simplification allows complex estimation, when labor markets (e.g. unemployment) is a major target of inference this simplification seems to remove the most interesting variation (e.g. employment friction and how it makes fast job changes undesirable all around). 

Clearly, if this is the state of the art, these models could be improved (heck, even an employment change penalty function would do wonders). 

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