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Shocks and Institutions in a Job Matching Model

Author

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  • den Haan, Wouter J.
  • Haefke, Christian
  • Ramey, Garey

Abstract

This paper explains the divergent behavior of European and US unemployment rates using a job market model of the labor market with an interaction between shocks and institutions. It shows that a reduction in TFP growth rates, an increase in real interest rates, and an increase in tax rates leads to a permanent increase in unemployment rates when the replacement rates or initial tax rates are high, while no increase in unemployment occurs when institutions are "employment friendly." The paper also shows that an increase in turbulence, modelled as an increased probability of skill loss, is not a robust explanation for the European unemployment puzzle in the context of a matching model with both endogenous job creation and job destruction.

Suggested Citation

  • den Haan, Wouter J. & Haefke, Christian & Ramey, Garey, 2001. "Shocks and Institutions in a Job Matching Model," University of California at San Diego, Economics Working Paper Series qt7x3544bn, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt7x3544bn
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    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
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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