Essays on the cyclicality of the user cost of labor

The dissertation is concerned with an empirical investigation of the cyclicality of the price of labor. If the labor market is a spot market, then the price of labor is the wage. But adding a worker is a long-term investment. The price of labor captures both the wage at the time of hiring and the impact of labor market conditions at the time of hiring on future wage payments. The price of labor, and not wage, is allocational for employment.;The first chapter of the dissertation is an attempt to provide an empirical measure of the cyclicality of the price of labor. Because the price of labor is not directly observed in the data, I construct the price of labor based on the behavior of individual wages and turnover. I find that although the data show that individual wages within the employment relationship are smoothed, a wedge between the cyclicality of wages of job stayers and job changers conceals a substantial procyclicality of the price of labor that a firm incurs. In particular, a one percentage point increase in unemployment generates a 4.5% decrease in the price of labor. This cyclicality is three times higher than the cyclicality of individual wages and also noticeably higher than the cyclicality of the wages of newly hired workers. I conclude that the allocational price of labor is very procyclical.;In the second chapter I investigate the cyclicality of the user cost of labor in search and matching models and show that the user cost of labor and not wage has an allocational role for employment. The wage component of the user cost of labor, the price of labor, includes the wage at the time of hiring as well as the expected effect of the economic conditions at the time of hiring on future wages. I calculate the cyclicality of the user cost and its components under alternative wage setting mechanisms in a search and matching model. I find that in the presence of implicit contracts the wage component of the user cost is much more cyclical than the wages of newly hired workers, which in turn are more cyclical than the wages of all workers. This is consistent with the empirical evidence in the first chapter. Recent papers stress rigid wages as an amplification mechanism for the fluctuations in the vacancy-unemployment ratio (Shimer 2005, Hall 2005). This mechanism works by reducing cyclicality of labor's user cost. Empirically I show that the wage component of the user cost is noticeably more procyclical than the individual wages due to a "lock in" effect to the labor market conditions at the time of hiring. When the models are calibrated to match the empirical cyclicality of the wage component of the user cost, the models generate approximately half of the empirical volatility of the vacancy-unemployment ratio regardless of the wage setting mechanism and the value of unemployment.;In the third chapter I investigate the cyclicality of wages and the price of labor in small and large establishments. This break is motivated by greater wage smoothing and, thus, possibly quantitatively more important effect for the cyclicality of the price of labor in large establishments. Using individual wage data, I find that wages in small establishments tend to be more cyclical than wages in large establishments. Once the effects of the labor market conditions from the start of job are not restricted to zero, the effect of the contemporaneous unemployment rate weakens considerably and becomes insignificant in all establishments.;I find that in both small and large establishments the price of labor, which is the expected implicit cost of a worker to an employer, is much more cyclical than individual wages. In fact, in contrast to wage cyclicality, the evidence suggests that the price of labor is not less cyclical in large establishments as compared with the price of labor in small establishments.