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Unemployment Dynamics and Cyclical Fluctuations in the Icelandic Labour Market

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  • Jósef Sigurdsson

Abstract

This paper studies business cycle dynamics in the Icelandic labour market with the focus on two separate but related dimensions. First, which margin for adjustment of labour input, the extensive margin or the intensive margin, accounts for more variation in total working hours? It finds that both margins are important. Variation in employment accounts for 56% of the overall variation in total hours while variation in hours per worker contributes 44% to variation in total hours. Second, which of the two unemployment transition rates, the separation rate or the job-finding rate, drives the observed fluctuations in unemployment, and how do these transition rates move over the business cycle? The results show that fluctuations in the separation rate explain 70% of the total variation in the unemployment rate. Both transition rates are highly cyclical. The procyclical job finding rate moves roughly contemporaneously with the cycle, while the countercyclical separation rate is found to lead the cycle.

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Bibliographic Info

Paper provided by Department of Economics, Central bank of Iceland in its series Economics with number wp56.

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Date of creation: Dec 2011
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Handle: RePEc:ice:wpaper:wp56

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  1. Luca Sala & Antonella Trigari & Mark Gertler, 2007. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," 2007 Meeting Papers 353, Society for Economic Dynamics.
  2. Michael R. Darby & John Haltiwanger & Mark Plant, 1984. "Unemployment-Rate Dynamics and Persistent Unemployment Under RAtional Expectations," UCLA Economics Working Papers 339, UCLA Department of Economics.
  3. Gomes, Pedro, 2009. "Labour market flows: facts from the United Kingdom," Bank of England working papers 367, Bank of England.
  4. Gary Solon & Ryan Michaels & Michael W. L. Elsby, 2009. "The Ins and Outs of Cyclical Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 84-110, January.
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  6. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, 02.
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  8. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  9. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  10. Shigeru Fujita & Garey Ramey, 2009. "The Cyclicality Of Separation And Job Finding Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 415-430, 05.
  11. Blanchard, Olivier J & Galí, Jordi, 2008. "Labour Markets and Monetary Policy: A New Keynesian Model with Unemployment," CEPR Discussion Papers 6765, C.E.P.R. Discussion Papers.
  12. Jósef Sigurdsson & Rannveig Sigurdardottir, 2011. "Evidence of Nominal Wage Rigidity and Wage Setting from Icelandic Microdata," Economics wp55, Department of Economics, Central bank of Iceland.
  13. Rogerson, Richard & Shimer, Robert, 2011. "Search in Macroeconomic Models of the Labor Market," Handbook of Labor Economics, Elsevier.
  14. Michael W.L. Elsby & Bart Hobijn & Aysegul Sahin, 2011. "Unemployment Dynamics in the OECD," Tinbergen Institute Discussion Papers 11-159/3, Tinbergen Institute.
  15. Jennifer C. Smith, 2011. "The Ins and Outs of UK Unemployment," Economic Journal, Royal Economic Society, vol. 121(552), pages 402-444, 05.
  16. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
  17. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
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Cited by:
  1. Bjarni G. Einarsson & Jósef Sigurdsson, 2013. "How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland," Economics wp64, Department of Economics, Central bank of Iceland.
  2. Jósef Sigurdsson & Rannveig Sigurdardottir, 2011. "Evidence of Nominal Wage Rigidity and Wage Setting from Icelandic Microdata," Economics wp55, Department of Economics, Central bank of Iceland.

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