Search Frictions in Macroeconomics

Abstract

This dissertation explores the role of search frictions in macroeconomics and highlights how these frictions influence micro-level decisions which in turn affect aggregated outcomes. Chapter 1 examines how individuals entering the job market during a recession can suffer persistent wage losses. I document how entering the job market during a recession not only affects wage outcomes but also severely impinges on early between-career changes. I then build a model that shows how entering the job market during a recession hampers early career mobility which is critical towards facilitating learning about one's comparative advantage and accumulating human capital specific to one's ideal career. Consequently, individuals who choose to switch careers post-recession are forced to restart at lower wages as they lack `relevant' career-specific human capital and certainty over their aptitude in their new careers. Permanent misallocation also arises when marginal workers who, having accumulated sufficient career-specific human capital, find it too costly to switch careers in the recovery. Persistent wage losses are a result of misallocation and experience gaps, both of which take time to correct. Chapter 2 looks at how consumer search behavior and the durability of the product affect firms' strategic pricing decisions. In the model, search is costly and consumers do not get to sample all prices in the market but rather have some positive probability of meeting only one or two sellers. In addition, consumers purchase goods that do not perish immediately and are able to postpone transactions. Firms face two types of customers: loyals and shoppers. The presence of a customer base and search frictions imply that a firm takes into account the consumer search method when setting prices. Durability of the product and the consumer's ability to postpone purchases suggest that consumers have greater bargaining power over the maximum price the firm is able to charge. In the numerical exercises, I show that all else equal, 1) the range of prices supported under durable goods is larger than the range of prices supported for non-durables, and 2) money is not neutral once the presence of a customer base is taken into account.