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Unemployment Dynamics and the Cost of Business Cycles

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  • Hairault, Jean-Olivier

    ()
    (University of Paris 1 Panthéon-Sorbonne)

  • Langot, François

    ()
    (University of Le Mans)

  • Osotimehin, Sophie

    ()
    (CREST & University of Paris 1 Panthéon-Sorbonne)

Abstract

In this paper, we investigate whether business cycles can imply sizable effects on average unemployment. First, using a reduced-form model of the labor market, 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 is enough to generate substantial welfare implications. This result also holds when we allow the job finding rate to be endogenous, provided the structural model is able to reproduce the volatility of the job finding rate. Moreover, the matching model embeds other non-linearities which alter the average job finding rate and so the business cycle cost.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3840.

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Length: 41 pages
Date of creation: Nov 2008
Date of revision:
Publication status: published in: Review of Economic Dynamics, 2010, 13(4), 759-779
Handle: RePEc:iza:izadps:dp3840

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Keywords: unemployment dynamics; business cycle costs;

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References

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  1. Beaudry, Paul & Pages, Carmen, 2001. "The cost of business cycles and the stabilization value of unemployment insurance," European Economic Review, Elsevier, Elsevier, vol. 45(8), pages 1545-1572, August.
  2. Harold L. Cole & Richard Rogerson, 1996. "Can the Mortonson-Pissarides matching model match the business cycle facts?," Staff Report, Federal Reserve Bank of Minneapolis 224, Federal Reserve Bank of Minneapolis.
  3. Philip Jung & Keith Kuester, 2008. "The (un)importance of unemployment fluctuations for welfare," Working Papers 08-31, Federal Reserve Bank of Philadelphia.
  4. Tom Krebs, 2005. "Job Displacement Risk and the Cost of Business Cycles," 2005 Meeting Papers, Society for Economic Dynamics 188, Society for Economic Dynamics.
  5. J. Bradford DeLong & Lawrence H. Summers, 1988. "How Does Macroeconomic Policy Affect Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 433-494.
  6. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "Job reallocation, employment fluctuations and unemployment," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 18, pages 1171-1228 Elsevier.
  7. Dale T. Mortensen, 2005. "More on Unemployment and Vacancy Fluctuations," 2005 Meeting Papers, Society for Economic Dynamics 326, Society for Economic Dynamics.
  8. Per Krusell & Anthony A. Smith, Jr., 1999. "On the Welfare Effects of Eliminating Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 245-272, January.
  9. John Kennan, 2006. "Private Information, Wage Bargaining and Employment Fluctuations," NBER Working Papers 11967, National Bureau of Economic Research, Inc.
  10. Hagedorn, Marcus & Manovskii, Iourii, 2008. "The cyclical behavior of equilibrium unemployment and vacancies revisited," Working Paper Series, European Central Bank 0853, European Central Bank.
  11. Gadi Barlevy, 2003. "The Cost of Business Cycles Under Endogenous Growth," NBER Working Papers 9970, National Bureau of Economic Research, Inc.
  12. Robert E. Hall & Paul R. Milgrom, 2005. "The Limited Influence of Unemployment on the Wage Bargain," NBER Working Papers 11245, National Bureau of Economic Research, Inc.
  13. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 415-430, 05.
  14. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
  15. Anne Epaulard & Aude Pommeret, 2003. "Recursive Utility, Endogenous Growth, and the Welfare Cost of Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 672-684, July.
  16. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 50-65, March.
  17. repec:fth:harver:1418 is not listed on IDEAS
  18. James S. Costain & Michael Reiter, 2003. "Business cycles, unemployment insurance and the calibration of matching models," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 872, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2006.
  19. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 25-49, March.
  20. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 112-32, March.
  21. tom krebs, 2004. "welfare cost of business cycles when markets are incomplete," Econometric Society 2004 North American Summer Meetings, Econometric Society 283, Econometric Society.
  22. Garey Ramey & Valerie A. Ramey, 1991. "Technology Commitment and the Cost of Economic Fluctuations," NBER Working Papers 3755, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Jana Kremer & Nikolai Stähler, 2013. "Structural and Cyclical Effects of Tax Progression," IAAEU Discussion Papers, Institute of Labour Law and Industrial Relations in the European Union (IAAEU) 201305, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
  2. Andersen, Torben M. & Svarer, Michael, 2010. "Business Cycle Dependent Unemployment Insurance," IZA Discussion Papers 5196, Institute for the Study of Labor (IZA).
  3. 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.
  4. Philip Jung & Keith Kuester, 2008. "The (un)importance of unemployment fluctuations for welfare," Working Papers 08-31, Federal Reserve Bank of Philadelphia.

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