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A Flow-Accounting Model of the Labor Market: An Application to Israel

Author

Listed:
  • Yossi Yakhin

    (Bank of Israel)

  • Natalya Presman

    (Bank of Israel)

Abstract

Since the early 2000s the unemployment rate in Israel has declined steadily at comparable points in the business cycle. We evaluate the extent to which this development reflects variation in business cycle intensity versus changes in noncyclical factors. To that end we utilize a theoretical flow-accounting model, similar to Blanchard and Diamond (1989), to study the dynamics of unemployment and vacancies in response to cyclical and non-cyclical changes in the labor market. We then use insights from the model as identifying restrictions on a structural VAR system in unemployment, vacancies and the labor force. The impulse response functions of the empirical model are in line with the predictions of the theoretical model. In particular, cyclical fluctuations, interpreted as aggregate activity shocks, move unemployment and vacancies in opposite directions, giving rise to the Beveridge curve, while structural movements, interpreted as changes in the average efficiency of matching unemployed workers to vacant jobs and developments in labor supply, shift the Beveridge curve. Our estimates suggest that non-cyclical factors have accounted for at least half of the decline of the unemployment rate during the period between 2004-Q1, when unemployment peaked at 10.9 percent, and 2011-Q4, when it marked a trough at 5.4 percent; suggesting a shift inward of the Beveridge curve.

Suggested Citation

  • Yossi Yakhin & Natalya Presman, 2013. "A Flow-Accounting Model of the Labor Market: An Application to Israel," Bank of Israel Working Papers 2013.05, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2013.05
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    References listed on IDEAS

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    3. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    4. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115(1), pages 69-102.
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    11. Berman, Eli, 1997. "Help Wanted, Job Needed: Estimates of a Matching Function from Employment Service Data," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages 251-292, January.
    12. Wall, Howard J & Zoega, Gylfi, 2002. "The British Beveridge Curve: A Tale of Ten Regions," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(3), pages 261-280, July.
    13. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
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    Cited by:

    1. Predrag Trpeski & Verica Janeska & Marijana Cvetanoska & Aleksandra Lozanoska, 2017. "Unemployment and a Stock – Flow Model on the Labour Market in the Republic of Macedonia," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 41-63.

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    More about this item

    Keywords

    Structural unemployment; Beveridge curve; SVAR with sign restrictions; Israel;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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