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Business Cycles, Unemployment Insurance, and the Calibration of Matching Models

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Author Info
James S. Costain ()
Michael Reiter ()

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Abstract

This paper points out an empirical failing of real business cycle models in which unemployment is endogenized through a matching function. One can easily choose a calibration to make the cyclical fluctuation in unemployment as large in the model as it is in the data, or to make the response of unemployment to a change in the unemployment benefit as small in the model as it is in the data. We show with a simple analytical calculation that in the standard job matching model, one cannot do both: improving the fit along one dimension makes it worse along the other. This conclusion is robust to the inclusion of capital, variable search intensity, variable match separation, or efficiency wages. We also propose two possible resolutions of the problem. Both sticky wages and embodied technological progress raise the business cycle variability of unemployment, without greatly changing the effects of policies, because they both make the flow of surplus to the firm more procyclical.

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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 1008.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_1008

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Related research
Keywords: real business cycles matching function unemployment insurance

Other versions of this item:

Find related papers by JEL classification:
C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
I38 - Health, Education, and Welfare - - Welfare and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  6. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January. [Downloadable!] (restricted)
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    Other versions:
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    Other versions:
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    Other versions:
  22. Cole, Harold L & Rogerson, Richard, 1999. "Can the Mortensen-Pissarides Matching Model Match the Business-Cycle Facts?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 933-59, November.
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Roger E. A. Farmer & Andrew Hollenhorst, 2006. "Shooting the Auctioneer," NBER Working Papers 12584, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. James Costain & Marcel Jansen, 2006. "Employment fluctuations with downward wage rigidity: the role of moral hazard," Banco de España Working Papers 0632, Banco de España. [Downloadable!]
  3. Bjoern Bruegemann & Giuseppe Moscarini, 2007. "Rent Rigidity, Asymmetric Information, and Volatility Bounds in Labor Markets," NBER Working Papers 13030, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Mark Gertler & Antonella Trigari, 2006. "Unemployment fluctuations with staggered Nash wage bargaining," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  5. Michael U. Krause & Thomas A. Lubik, 2007. "On-the-job search and the cyclical dynamics of the labor market," Working Paper Series 779, European Central Bank. [Downloadable!]
    Other versions:
  6. Mark Bils & Yongsung Chang & Sun-Bin Kim, 2007. "Comparative Advantage in Cyclical Unemployment," NBER Working Papers 13231, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. James Costain & Marcel Jansen, 2006. "Employment Fluctuations with Downward Wage Rigidity," Computing in Economics and Finance 2006 204, Society for Computational Economics. [Downloadable!]
  8. Christopher A. Pissarides, 2007. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," CEP Discussion Papers dp0839, Centre for Economic Performance, LSE. [Downloadable!]
  9. Michael Reiter, 2006. "Embodied Technical Change And The Fluctuations Of Wages and Unemployment," Economics Working Papers 980, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  10. Simon Burgess & Helene Turon, 2005. "Worker Flows, Job Flows and Unemployment in a Matching Model," Bristol Economics Discussion Papers 05/572, Department of Economics, University of Bristol, UK. [Downloadable!]
  11. Matthias S. Hertweck, 2006. "Strategic Wage Bargaining, Labor Market Volatility, and Persistence," Economics Working Papers ECO2006/42, European University Institute. [Downloadable!]
  12. Robert Shimer, 2004. "The Consequences of Rigid Wages in Search Models," NBER Working Papers 10326, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Christian Haefke & Marcus Sonntag & Thijs van Rens, 2007. "Wage Rigidity and Job Creation," Economics Working Papers 1047, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2007. [Downloadable!]
    Other versions:
  14. Rafael Domenech & Javier Andres & Javier Ferri, 2006. "Price Rigidity and the Volatility of Vacancies and Unemployment," Working Papers 0601, International Economics Institute, University of Valencia. [Downloadable!]
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