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Do Job Destruction Shocks Matter in the Theory of Unemployment?

Author

Listed:
  • 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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    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:

    1. Yusuf Mercan & Benjamin Schoefer & Petr Sedláček, 2024. "A Congestion Theory of Unemployment Fluctuations," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(1), pages 238-285, January.
    2. Deschamps, Pierre & Wilemme, Guillaume, 2025. "Local labor market dynamics and agglomeration effects," European Economic Review, Elsevier, vol. 180(C).
    3. Haefke, Christian & Reiter, Michael, 2020. "Long Live the Vacancy," GLO Discussion Paper Series 654, Global Labor Organization (GLO).
    4. Yusuf Mercan & Benjamin Schoefer, 2020. "Jobs and Matches: Quits, Replacement Hiring, and Vacancy Chains," American Economic Review: Insights, American Economic Association, vol. 2(1), pages 101-124, March.
    5. Adjemian, Stéphane & Karamé, Frédéric & Langot, François, 2021. "Nonlinearities and Workers' Heterogeneity in Unemployment Dynamics," IZA Discussion Papers 14822, IZA Network @ LISER.
    6. Guimarães, Luís & Mazeda Gil, Pedro, 2022. "Looking ahead at the effects of automation in an economy with matching frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    7. Niklas Engbom, 2019. "Application Cycles," 2019 Meeting Papers 1170, Society for Economic Dynamics.
    8. Guimarães, Luís & Mazeda Gil, Pedro, 2022. "Explaining the Labor Share: Automation Vs Labor Market Institutions," Labour Economics, Elsevier, vol. 75(C).
    9. Gabrovski, Miroslav & Silva, Mario Rafael, 2025. "Unemployment and labor productivity comovement: the role of firm exit," Journal of Economic Dynamics and Control, Elsevier, vol. 181(C).
    10. 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.
    11. Wu, Jhih-Chian, 2025. "Job separation shocks, costly vacancy creation and job rationing," European Economic Review, Elsevier, vol. 177(C).
    12. Pawel M. Krolikowski & Kurt G. Lunsford, 2024. "Advance layoff notices and aggregate job loss," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(3), pages 462-480, April.
    13. 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.
    14. Ge, Teng Ge & Moghaddasi Kelishomi, Ali, 2025. "Income Inequality and Housing Affordability," CAGE Online Working Paper Series 753, Competitive Advantage in the Global Economy (CAGE).
    15. Nikolaos Kokonas & Paulo Santos Monteiro, 2020. "The Ins and Outs of Unemployment in General Equilibrium," Discussion Papers 2014, Centre for Macroeconomics (CFM).
    16. Robert E. Hall & Marianna Kudlyak, 2022. "Why Has the US Economy Recovered So Consistently from Every Recession in the Past 70 Years?," NBER Macroeconomics Annual, University of Chicago Press, vol. 36(1), pages 1-55.
    17. Potter, Tristan, 2024. "Destabilizing search technology," Journal of Monetary Economics, Elsevier, vol. 145(C).
    18. Ellington, Michael & Martin, Chris & Wang, Bingsong, 2021. "Search Frictions and Evolving Labour Market Dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 127(C).
    19. Joshua Bernstein & Alexander W. Richter & Nathaniel A. Throckmorton, 2021. "Nonlinear Search and Matching Explained," Working Papers 2106, Federal Reserve Bank of Dallas.
    20. Riccardo M. Masolo, 2022. "Mainly Employment: Survey-Based News and the Business Cycle," Discussion Papers 2211, Centre for Macroeconomics (CFM).
    21. Colciago, Andrea & Fasani, Stefano & Rossi, Lorenza, 2025. "Firm entry, endogenous wage moderation, and labor market dynamics," European Economic Review, Elsevier, vol. 172(C).

    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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