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Unemployment and vacancy dynamics with imperfect financial markets

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  • Carrillo-Tudela, Carlos
  • Graber, Michael
  • Waelde, Klaus

Abstract

This paper proposes a simple general equilibrium model with labour market frictions and an imperfect financial market. The aim of the paper is to analyse the transitional dynamics of unemployment and vacancies when financial constraints are in place. We model the financial sector as a monopolistically competitive banking sector that intermediates financial capital between firms. This structure implies a per period financial resource constraint which has a closed form solution and describes the transition path of unemployment and vacancies to their steady state values. We show that the transition path crucially depends on the degree of wage flexibility. When wages do not depend on the unemployment rate the transition path is always downward sloping. This implies unemployment and vacancies adjust in opposite directions as observed in the data. When calibrating the model to the Great Recession and its aftermath we find that the lack of an improvement in the financial sector's effectiveness to intermediate resources played a crucial role in the slow recovery of the labour market.

Suggested Citation

  • Carrillo-Tudela, Carlos & Graber, Michael & Waelde, Klaus, 2018. "Unemployment and vacancy dynamics with imperfect financial markets," Labour Economics, Elsevier, vol. 50(C), pages 128-143.
    • Handle: RePEc:eee:labeco:v:50:y:2018:i:c:p:128-143
    DOI: 10.1016/j.labeco.2017.04.005
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    2. Yulia Moiseeva, 2020. "The Interaction between Credit and Labor Market Frictions," Discussion Paper Series, School of Economics and Finance 202007, School of Economics and Finance, University of St Andrews.
    3. Clymo, Alex, 2020. "Discounts, rationing, and unemployment," European Economic Review, Elsevier, vol. 128(C).

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    More about this item

    Keywords

    Job search; Unemployment; Financial markets;
    All these keywords.

    JEL classification:

    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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