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The (un)importance of unemployment fluctuations for welfare

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  • Philip Jung
  • Keith Kuester

Abstract

This paper develops a real business cycle model with labor market search and matching frictions, which endogenously links both the cyclical fluctuations and the mean level of unemployment to the aggregate business cycle risk. The key result of the paper is that business cycles are costly for all consumers, regardless of their wealth, yet that unemployment fluctuations themselves are not the source of these costs. Rather fluctuations over the cycle induce higher average unemployment rates as employment is non-linear in job-finding rates and past unemployment. The authors first show this result analytically in special cases. They then calibrate a general equilibrium model with risk-averse asset-holding and liquidity-constrained workers to US data. Also under these more general circumstances, business cycles mean higher unemployment for all workers. The ensuing costs of cycles rise further for liquidity-constrained agents when replacement rates are lower or when workers' skills depend on the length of (un)employment spells.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 08-31.

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Date of creation: 2008
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Handle: RePEc:fip:fedpwp:08-31

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Keywords: Unemployment ; Welfare ; Business cycles;

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References

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  1. MUKOYAMA, Toshihiko & ŞAHIN, Ayşegül, 2005. "Costs of Business Cycles for Unskilled Workers," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 15-2005, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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Citations

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Cited by:
  1. Krusell, Per & Mukoyama, Toshihiko & Sahin, Aysegul, 2009. "Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7429, C.E.P.R. Discussion Papers.
  2. Enders, Zeno & Jung, Philip & Müller, Gernot, 2012. "Has the Euro changed the Business Cycle?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9233, C.E.P.R. Discussion Papers.
  3. Moreno-Galbis, Eva, 2012. "The impact of TFP growth on the unemployment rate: Does on-the-job training matter?," European Economic Review, Elsevier, Elsevier, vol. 56(8), pages 1692-1713.
  4. Hairault, Jean-Olivier & Langot, François & Osotimehin, Sophie, 2008. "Unemployment Dynamics and the Cost of Business Cycles," IZA Discussion Papers 3840, Institute for the Study of Labor (IZA).
  5. Jean-Olivier Hairault & Francois Langot & Sophie Osotimehin, 2010. "Matching frictions, unemployment dynamics and the cost of business cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 759-779, October.
  6. Miguel Casares & Antonio Moreno & Jesús Vázquez, 2009. "Wage Stickiness and Unemployment Fluctuations: An Alternative Approach," Faculty Working Papers, School of Economics and Business Administration, University of Navarra 04/09, School of Economics and Business Administration, University of Navarra.

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