The cyclicality of the user cost of labor

• The user cost of labor acknowledges labor to be a long-term asset with adjustment costs.
• The user cost is more procyclical than average wages or wages of newly hired workers.
• The estimate of its cyclicality is used to study the unemployment-volatility puzzle.

The user cost of labor is the expected difference between the present discounted value of wages paid to a worker hired in the current period and that paid to a worker hired in the next period. Analogous to the price of any long-term asset, the user cost, not wage, is the relevant price for a firm that is considering adding a worker. I construct its counterpart in the data and estimate that it is substantially more procyclical than average wages or wages of newly hired workers. I demonstrate an application of the finding using the textbook search and matching model.