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Matching frictions, unemployment dynamics and the cost of business cycles

Author

Listed:
  • Jean-Olivier Hairault

    (Universite de Paris I)

  • Francois Langot

    (Universite du Maine)

  • Sophie Osotimehin

    (Universite de Paris I)

Abstract

We investigate the welfare cost of business cycles implied by matching frictions. First, using the reduced-form of the matching model, 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 increases average unemployment, which leads to substantial business cycles costs. Moreover, the structural matching model embeds other non-linearities, which alter the average job finding rate and consequently the welfare cost of business cycles. Our theory suggests to subsidize employment in order to dampen the impact of the job finding rate fluctuations on welfare. (Copyright: Elsevier)

Suggested Citation

  • 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, vol. 13(4), pages 759-779, October.
    • Handle: RePEc:red:issued:09-238
    DOI: 10.1016/j.red.2010.05.001
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    as
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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