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Endogenous separation, wage rigidity and the dynamics of unemployment

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  • Tortorice, Daniel L.

Abstract

Previous attempts to evaluate the Mortensen–Pissarides model rely on either endogenous separation or wage rigidity. In this paper I simulate a version of the Mortensen–Pissarides (MP) model with wage rigidity and endogenous separation. The model is then able to answer a key question in the literature: can wage rigidity and endogenous separation explain the joint dynamics of unemployment, vacancies and wages? I find that it can. The model generates sufficient volatility in unemployment, the separation rate and the finding rate, 75% of the observed volatility in vacancies, and 70% of the Beveridge curve (the negative correlation between unemployment and vacancies). More substantially, the model matches the volatility of the average wage and generates a response of new hires’ wages to productivity and unemployment consistent with key estimates in the literature. I then simulate the model while restricting the separation rate to be constant and show that the model predicts only 70% of the variance of unemployment. I conclude that finding rate fluctuations explain 70% of unemployment fluctuations halfway in between the most prominent estimates in the literature.

Suggested Citation

  • Tortorice, Daniel L., 2013. "Endogenous separation, wage rigidity and the dynamics of unemployment," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 179-191.
  • Handle: RePEc:eee:jmacro:v:38:y:2013:i:pb:p:179-191
    DOI: 10.1016/j.jmacro.2013.06.002
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    Cited by:

    1. Anete Pajuste & Hernán Ruffo, 2017. "Wage rigidity and workers’ flows during recessions," SSE Riga/BICEPS Research Papers 4, Baltic International Centre for Economic Policy Studies (BICEPS);Stockholm School of Economics in Riga (SSE Riga).
    2. Markus Kirchner & Rodrigo Tranamil, 2016. "Calvo Wages Vs. Search Frictions: a Horse Race in a DSGE Model of a Small Open Economy," Working Papers Central Bank of Chile 778, Central Bank of Chile.

    More about this item

    Keywords

    Unemployment; Search models; Business cycles;

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • 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

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