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Turbulence And Unemployment In A Job Matching Model

  • Wouter J. den Haan

    (London Business School,)

  • Christian Haefke

    (Universitat Pompeu Fabra,)

  • Garey Ramey

    (University of California, San Diego,)

According to Ljungqvist and Sargent (1998), high European unemployment since the 1980s can be explained by a rise in economic turbulence, leading to greater numbers of unemployed workers with obsolete skills. These workers refuse newjobs due to high unemployment benefits. In this paper we reassess the turbulence-unemployment relationship using a matching model with endogenous job destruction. In our model, higher turbulence reduces the incentives of employed workers to leave their jobs. If turbulence has only a tiny effect on the skills of workers experiencing endogenous separation, then the results of Ljungqvist and Sargent (1998, 2004) are reversed, and higher turbulence leads to a reduction in unemployment. Thus, changes in turbulence cannot provide an explanation for European unemployment that reconciles the incentives of both unemployed and employed workers. (JEL: E24, J64) Copyright (c) 2005 by the European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 3 (2005)
Issue (Month): 6 (December)
Pages: 1360-1385

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Handle: RePEc:tpr:jeurec:v:3:y:2005:i:6:p:1360-1385
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