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Endogenous Separation, Wage Rigidity and the Dynamics of Unemployment

  • Daniel Tortorice

    ()

    (Department of Economics, Brandeis University)

This paper shows that the Mortensen-Pissarides (MP) model requires endogenous separation to explain the volatility of unemployment. I estimate a version of the MP model with wage rigidity and permanent shocks to match productivity. The model generates sufficient volatility in unemployment, vacancies, job-finding and job-separation despite relatively low worker outside options. I then re-estimate the model while restricting the separation rate to be constant and show that, even though the estimation procedure finds the best fitting model, the model predicts too little variance in unemployment and too much variance in the job-finding rate. Based on this result I conclude that models of unemployment fluctuations need endogenous separation rates to explain unemployment fluctuations.

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File URL: http://www.brandeis.edu/departments/economics/RePEc/brd/doc/Brandeis_WP07.pdf
File Function: First version, 2010
Download Restriction: no

Paper provided by Brandeis University, Department of Economics and International Businesss School in its series Working Papers with number 07.

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Length: 30 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:brd:wpaper:07
Contact details of provider: Postal: MS032, P.O. Box 9110, Waltham, MA 02454-9110
Web page: http://www.brandeis.edu/departments/economics/

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  13. Shigeru Fujita, 2004. "Vacancy persistence," Working Papers 04-23, Federal Reserve Bank of Philadelphia.
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  19. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
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  26. Christopher J. Flinn, 2006. "Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates," Econometrica, Econometric Society, vol. 74(4), pages 1013-1062, 07.
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