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Do Job Destruction Shocks Matter in the Theory of Unemployment?

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  • Melvyn G. Coles
  • Ali Moghaddasi Kelishomi

Abstract

Because the data show that market tightness is not orthogonal to unemployment, this paper identifies the many empirical difficulties caused by adopting the free entry of vacancies assumption in the Diamond-Mortensen-Pissarides (DMP) framework. Relaxing the free entry assumption and using Simulated Method of Moments (SMM) finds the vacancy creation process is less than infinitely elastic. Because a recession-leading job separation shock then causes vacancies to fall as unemployment increases, the ad hoc restriction to zero job separation shocks (to generate Beveridge curve dynamics) becomes redundant. In contrast to standard arguments, the calibrated model finds the job separation process drives unemployment volatility over the cycle.

Suggested Citation

  • Melvyn G. Coles & Ali Moghaddasi Kelishomi, 2018. "Do Job Destruction Shocks Matter in the Theory of Unemployment?," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(3), pages 118-136, July.
  • Handle: RePEc:aea:aejmac:v:10:y:2018:i:3:p:118-36
    Note: DOI: 10.1257/mac.20150040
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Do Job Destruction Shocks Matter in the Theory of Unemployment?
      by Christian Zimmermann in NEP-DGE blog on 2016-02-20 03:01:08

    Citations

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    Cited by:

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    2. Mercan, Yusuf & Schoefer, Benjamin & Sedlacek, Petr, 2020. "A Congestion Theory of Unemployment Fluctuations," CEPR Discussion Papers 15500, C.E.P.R. Discussion Papers.
    3. Haefke, Christian & Reiter, Michael, 2020. "Long Live the Vacancy," IHS Working Paper Series 22, Institute for Advanced Studies.
    4. Haefke, Christian & Reiter, Michael, 2020. "Long Live the Vacancy," GLO Discussion Paper Series 654, Global Labor Organization (GLO).
    5. Christian Haefke & Michael Reiter, 2020. "Long Live the Vacancy," Working Papers 20200054, New York University Abu Dhabi, Department of Social Science, revised Sep 2020.
    6. Mercan, Yusuf & Schoefer, Benjamin, 2019. "Jobs and Matches: Quits, Replacement Hiring, and Vacancy Chains," CEPR Discussion Papers 14208, C.E.P.R. Discussion Papers.
    7. Adjemian, Stéphane & Karamé, Frédéric & Langot, François, 2021. "Nonlinearities and Workers' Heterogeneity in Unemployment Dynamics," IZA Discussion Papers 14822, Institute of Labor Economics (IZA).
    8. Niklas Engbom, 2019. "Application Cycles," 2019 Meeting Papers 1170, Society for Economic Dynamics.
    9. Den Haan, Wouter J. & Freund, Lukas & Kaerner Rendahl, Pontus, 2021. "Volatile hiring: uncertainty in search and matching models," LSE Research Online Documents on Economics 111568, London School of Economics and Political Science, LSE Library.
    10. Ellington, Michael & Martin, Chris & Wang, Bingsong, 2021. "Search Frictions and Evolving Labour Market Dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 127(C).
    11. Den Haan, W. & Freund, L. B. & Rendahl, P., 2020. "Volatile Hiring: Uncertainty in Search and Matching Models," Cambridge Working Papers in Economics 20125, Faculty of Economics, University of Cambridge.
    12. Joshua Bernstein & Alexander W. Richter & Nathaniel A. Throckmorton, 2021. "Nonlinear Search and Matching Explained," Working Papers 2106, Federal Reserve Bank of Dallas.
    13. Masolo, Riccardo M, 2022. "Mainly employment: survey-based news and the business cycle," Bank of England working papers 958, Bank of England.
    14. Robert E. Hall & Marianna Kudlyak, 2021. "Why Has the US Economy Recovered So Consistently from Every Recession in the Past 70 Years?," NBER Chapters, in: NBER Macroeconomics Annual 2021, volume 36, pages 1-55, National Bureau of Economic Research, Inc.
    15. Pawel Krolikowski & Kurt Graden Lunsford, 2020. "Advance Layoff Notices and Aggregate Job Loss," Working Papers 20-03R, Federal Reserve Bank of Cleveland, revised 02 Feb 2022.
    16. Joshua Bernstein & Alexander W. Richter & Nathaniel A. Throckmorton, 2020. "The Business Cycle Mechanics of Search and Matching Models," Working Papers 2026, Federal Reserve Bank of Dallas.
    17. Den Haan, Wouter J. & Freund, Lukas B. & Rendahl, Pontus, 2021. "Volatile hiring: uncertainty in search and matching models," Journal of Monetary Economics, Elsevier, vol. 123(C), pages 1-18.

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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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