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The shifting and twisting Beveridge curve: an aggregate perspective

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  • Thomas A. Lubik
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    Abstract

    One of the most striking aspects of the Great Recession in the United States is the persistently high level of unemployment despite an uptick in economic activity and an increased willingness by firms to hire. This has stimulated a debate on mismatch in the labor market. The argument is that despite the high unemployment rate the effective pool of job seekers is considerably smaller due to adverse effects of long-term unemployment, high unemployment benefits or structural change. Despite high vacancy postings, firms are therefore unable to hire desired workers. I study this issue from an aggregate perspective by deriving the Beveridge curve from a discrete-time search and matching model of the labor market driven by a variety of shocks. I first establish that the observed pattern in the data can only be described in the context of the model by the interaction of a cyclical decline in productivity and a decline in match efficiency. I then estimate the model using Bayesian methods on unemployment and vacancy data before the onset of the Great Recession. The posterior estimates indicate that the recent behavior of the Beveridge curve is most likely explained by a structural decline in match efficiency.

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    Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 13-16.

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    Date of creation: 2013
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    Handle: RePEc:fip:fedrwp:13-16

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    1. Marcus Hagedorn & Iourii Manovskii, 2007. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," IEW - Working Papers 351, Institute for Empirical Research in Economics - University of Zurich.
    2. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
    4. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    5. Barbara Petrongolo & Christopher Pissarides, 2000. "Looking into the black box: a survey of the matching function," LSE Research Online Documents on Economics 2122, London School of Economics and Political Science, LSE Library.
    6. Francesco Furlanetto & Nicolas Groshenny, 2013. "Mismatch shocks and unemployment during the Great Recession," Working Paper 2013/16, Norges Bank.
    7. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
    8. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    9. Thomas A. Lubik, 2012. "Aggregate Labour Market Dynamics In Hong Kong," Pacific Economic Review, Wiley Blackwell, vol. 17(2), pages 257-279, 05.
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