The Matching Multiplier and the Amplification of Recessions
040820-WP-The Matching Multiplier and the Amplification of Recessions-Patterson
Christina Patterson, Massachusetts Institute of Technology
This paper shows that the unequal incidence of recessions in the labor market amplifies aggregate shocks. I define the Matching Multiplier as the increase in the output multiplier stemming from the matching of high marginal propensity to consume (MPC) workers to cyclical jobs. Using administrative data from the United States, I document a positive covariance between worker MPCs and their elasticity of earnings to GDP. This covariance is large enough to increase shock amplification by 40 percent over an equal exposure benchmark. I provide additional evidence for this mechanism using local labor market variation and a dynamic incomplete-markets model.