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Jobs and Unemployment in Macroeconomic Theory: A Turbulence Laboratory

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Ljungqvist, Lars
Sargent, Thomas J

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Abstract

We use three general equilibrium frameworks with jobs and unemployed workers to study the effects of government mandated unemployment insurance (UI) and employment protection (EP). To illuminate the forces in these models, we study how UI and EP affect outcomes when there is higher 'turbulence' in the sense of worse skill transition probabilities for workers who suffer involuntary layoffs. Matching and search-island models have labour market frictions and incomplete markets. The representative family model with employment lotteries has no labour market frictions and complete markets. The adverse welfare state dynamics coming from high UI indexed to past earnings that were isolated by Ljungqvist and Sargent (1998) are so strong that they determine outcomes in all three frameworks. Another force stressed by Ljungqvist and Sargent (2005), through which higher layoff taxes suppress frictional unemployment in less turbulent times, prevails in the models with labour market frictions, but not in the frictionless representative family model. In addition, the high aggregate labour supply elasticity that emerges from employment lotteries and complete insurance markets in the representative family model makes it impossible to include generous government-supplied unemployment insurance in that model without getting the unrealistic result that economic activity virtually shuts down.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5340.

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Date of creation: Nov 2005
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Handle: RePEc:cpr:ceprdp:5340

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Keywords: discouraged worker employment protection job matching search skills turbulence unemployment unemployment insurance

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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  1. Lars Ljungqvist & Thomas J. Sargent, 2004. "European Unemployment and Turbulence Revisited in a Matching Model," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 456-468, 04/05. [Downloadable!] (restricted)
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  2. César Alonso-Borrego & Jesús Fernández-Villaverde & José E. Galdón-Sánchez, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," Economics Working Papers we042307, Universidad Carlos III, Departamento de Economía. [Downloadable!]
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  3. Martin Browning & Lars Peter Hansen & James J. Heckman, 1999. "Micro Data and General Equilibrium Models," Discussion Papers 99-10, University of Copenhagen. Department of Economics.
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  4. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October. [Downloadable!] (restricted)
  5. Den Haan, Wouter & Haefke, Christian & Ramey, Gary, 2001. "Shocks and Institutions in a Job Matching Model," CEPR Discussion Papers 2970, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November. [Downloadable!] (restricted)
  7. Jovanovic, B. & Nyarko, Y., 1996. "Learning by Doing and the Choice of Technology," Working Papers 96-25, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  8. Lars Ljungqvist, 2002. "How Do Lay--off Costs Affect Employment?," Economic Journal, Royal Economic Society, vol. 112(482), pages 829-853, October. [Downloadable!] (restricted)
  9. Ljungqvist, Lars & Sargent, Thomas J., 1997. "The European Unemployment Dilemma," Working Paper Series in Economics and Finance 178, Stockholm School of Economics.
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  10. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  11. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February. [Downloadable!] (restricted)
  12. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 57(2), pages 279-98, April. [Downloadable!] (restricted)
  13. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier. [Downloadable!] (restricted)
  14. Jaewoo Ryoo & Sherwin Rosen, 2004. "The Engineering Labor Market," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages S110-S140, February. [Downloadable!] (restricted)
  15. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Blackwell Publishing, vol. 49(2), pages 217-27, April. [Downloadable!] (restricted)
  16. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June. [Downloadable!] (restricted)
  17. McCall, John J, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, MIT Press, vol. 84(1), pages 113-26, February. [Downloadable!] (restricted)
  18. Hansen, Gary D. & Sargent, Thomas J., 1988. "Straight time and overtime in equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 281-308. [Downloadable!] (restricted)
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  19. Cole, Harold L & Kocherlakota, Narayana R, 2001. "Efficient Allocations with Hidden Income and Hidden Storage," Review of Economic Studies, Blackwell Publishing, vol. 68(3), pages 523-42, July.
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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. Morten O. Ravn, 2006. "The Consumption-Tightness Puzzle," NBER Working Papers 12421, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Olivier Blanchard, 2005. "European Unemployment: The Evolution of Facts and Ideas," NBER Working Papers 11750, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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