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Uncertainty, Productivity and Unemployment in the Great Depression

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  • Edouard Schaal

    (Princeton University)

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    Abstract

    The current 2007-2010 recession has witnessed two phenomena that standard search models of the labor market have diculty reconciling: a large and persistent increase in unemployment and a sharp rise, above pre-recession levels, in labor productivity following a small initial drop. In addition, these observations were accompanied by a signicant increase in the dispersion of rm growth rates. In this paper, I develop a tractable dynamic search model of heterogeneous rms with decreasing returns, in which I introduce uncertainty shocks. An increase in the idiosyncratic uncertainty faced by rms leads to higher unemployment, larger measured productivity, and more dispersion in rm growth rates. A combination of aggregate productivity and uncertainty shocks is able to explain many of the patterns observed in the ongoing recession, including the joint dynamics of unemployment and productivity. In addition to these ndings, the model performs well at explaining business cycle statistics in ordinary times and is able to reproduce a range of observations at the establishment and cross-sectional levels, such as the employment behavior of establishments.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1450.

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    Date of creation: 2011
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    Handle: RePEc:red:sed011:1450

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    1. Steffen Elstner & Eric Sims & Ruediger Bachmann, 2010. "Uncertainty and Economic Activity: Evidence from Business Survey Data," 2010 Meeting Papers 614, Society for Economic Dynamics.
    2. Shigeru Fujita & Makoto Nakajima, 2009. "Worker flows and job flows: a quantitative investigation," Working Papers 09-33, Federal Reserve Bank of Philadelphia.
    3. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Working Papers tecipa-437, University of Toronto, Department of Economics.
    4. Leo Kaas & Philipp Kircher, 2011. "Efficient Firm Dynamics in a Frictional Labor Market," CESifo Working Paper Series 3336, CESifo Group Munich.
    5. Ruediger Bachmann & Christian Bayer, 2009. "Firm-Specific Productivity Risk over the Business Cycle: Facts and Aggregate Implications," CESifo Working Paper Series 2844, CESifo Group Munich.
    6. Giuseppe Moscarini & Fabien Postel-Vinay, 2009. "Large Employers Are More Cyclically Sensitive," NBER Working Papers 14740, National Bureau of Economic Research, Inc.
    7. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
    8. Hawkins, William B. & Acemoglu, Daron, 0. "Search with multi-worker firms," Theoretical Economics, Econometric Society.
    9. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle, Second Version," PIER Working Paper Archive 09-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Feb 2009.
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