Matching frictions, unemployment dynamics and the cost of business cycles
AbstractWe investigate the welfare cost of business cycles implied by matching frictions. First, using the reduced-form of the matching model, we show that job finding rate fluctuations generate intrinsically a non-linear effect on unemployment: positive shocks reduce unemployment less than negative shocks increase it. For the observed process of the job finding rate in the US economy, this intrinsic asymmetry increases average unemployment, which leads to substantial business cycles costs. Moreover, the structural matching model embeds other non-linearities, which alter the average job finding rate and consequently the welfare cost of business cycles. Our theory suggests to subsidizing employment in order to dampen the impact of the job finding rate fluctuations on welfare.
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Date of creation: 01 Oct 2010
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Publication status: Published, Review of Economic Dynamics, 2010, 13, 4, 759-779
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Business cycle costs; Unemployment dynamics; Matching;
Other versions of this item:
- 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, vol. 13(4), pages 759-779, October.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-25 (All new papers)
- NEP-BEC-2010-09-25 (Business Economics)
- NEP-CBA-2010-09-25 (Central Banking)
- NEP-DGE-2010-09-25 (Dynamic General Equilibrium)
- NEP-LAB-2010-09-25 (Labour Economics)
- NEP-MAC-2010-09-25 (Macroeconomics)
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