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Turbulence and Unemployment in a Job Matching Model

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  • den Haan, Wouter J.

    ()
    (University of Amsterdam)

  • Haefke, Christian

    ()
    (New York University, Abu Dhabi)

  • Ramey, Garey

    ()
    (University of California, San Diego)

Abstract

According to Ljungqvist and Sargent (1998), high European unemployment since the 1980s can be explained by a rise in economic turbulence, leading to greater numbers of unemployed workers with obsolete skills. These workers refuse new jobs due to high unemployment benefits. In this paper we reassess the turbulence-unemployment relationship using a matching model with endogenous job destruction. In our model, higher turbulence reduces the incentives of employed workers to leave their jobs. If turbulence has only a tiny effect on the skills of workers experiencing endogenous separation, then the results of Ljungqvist and Sargent (1998, 2004) are reversed, and higher turbulence leads to a reduction in unemployment. Thus, changes in turbulence cannot provide an explanation for European unemployment that reconciles the incentives of both unemployed and employed workers.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1403.

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Length: 41 pages
Date of creation: Nov 2004
Date of revision:
Publication status: published in: Journal of the European Economic Association, 2005, 3 (6), 1360-1385
Handle: RePEc:iza:izadps:dp1403

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Keywords: European unemployment puzzle; skill loss;

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  1. Franz, Wolfgang, 1999. "Real and monetary challenges to wage policy in Germany at the turn of the millennium: technical progress, globalization and European Monetary Union," ZEW Discussion Papers 99-48, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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  3. Ljungqvist, Lars & Sargent, Thomas J., 1997. "The European Unemployment Dilemma," Working Paper Series in Economics and Finance 178, Stockholm School of Economics.
  4. Wouter Den Haan & Christian Haefke & Garey Ramey, 2001. "Shocks and Institutions in a Job Matching Model," NBER Working Papers 8463, National Bureau of Economic Research, Inc.
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  9. den Haan, Wouter J. & Ramey, Garey & Watson, Joel, 2000. "Job destruction and the experiences of displaced workers," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 52(1), pages 87-128, June.
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  12. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March.
  13. Stephen Nickell, 2003. "Labour Market Institutions and Unemployment in OECD Countries," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 1(2), pages 13-26, October.
  14. Becker, Gary S & Landes, Elisabeth M & Michael, Robert T, 1977. "An Economic Analysis of Marital Instability," Journal of Political Economy, University of Chicago Press, vol. 85(6), pages 1141-87, December.
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