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The Shimer Puzzle and the Correct Identification of Productivity Shocks

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  • Régis Barnichon

Abstract

Shimer (2005a) claims that the Mortensen-Pissarides search model of unemployment lacks an ampiflication mechanism because it cannot generate the observed business cycle fluctuations in unemployment given labor productivity shocks of plausible magnitude. This paper argues that part of the problem lies with the correct identification of productivity shocks. Because of the endogeneity of measured labor productivity, filtering out the trend component as in Shimer (2005a) may not correctly identify the shocks driving unemployment. Using a New- Keynesian framework with search unemployment, this paper estimates that close to 50% of the Shimer puzzle is due to the misidentification of productivity shocks. In addition, I show that extending the search model with an aggregate demand side remarkably improves the ability of the standard search model to match the moments of key labor market variables.

Suggested Citation

  • Régis Barnichon, 2007. "The Shimer Puzzle and the Correct Identification of Productivity Shocks," CEP Discussion Papers dp0823, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0823
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    References listed on IDEAS

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    1. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
    2. Dale Mortensen & Eva Nagypal, 2007. "More on Unemployment and Vacancy Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(3), pages 327-347, July.
    3. Fujita, Shigeru & Ramey, Garey, 2007. "Job matching and propagation," Journal of Economic Dynamics and Control, Elsevier, vol. 31(11), pages 3671-3698, November.
    4. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
    5. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    6. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    7. Robert E. Hall, 2005. "Job Loss, Job Finding, and Unemployment in the U.S. Economy Over the Past Fifty Years," NBER Working Papers 11678, National Bureau of Economic Research, Inc.
    8. Barnichon, Regis, 2007. "Productivity, aggregate demand and unemployment fluctuations," LSE Research Online Documents on Economics 19694, London School of Economics and Political Science, LSE Library.
    9. Robert Shimer, 2005. "The cyclicality of hires, separations, and job-to-job transitions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 493-508.
    10. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
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    Citations

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    Cited by:

    1. Ravenna, Federico & Walsh, Carl E., 2008. "Vacancies, unemployment, and the Phillips curve," European Economic Review, Elsevier, vol. 52(8), pages 1494-1521, November.
    2. Marco Guerrazzi, 2011. "Search And Stochastic Dynamics In The Old Keynesian Economics: A Rationale For The Shimer Puzzle," Metroeconomica, Wiley Blackwell, vol. 62(4), pages 561-586, November.
    3. Federico Ravenna & Carl E. Walsh, 2009. "The welfare consequences of monetary policy," Working Paper Series 2009-12, Federal Reserve Bank of San Francisco.
    4. Marianna Riggi, 2010. "Nominal And Real Wage Rigidities In New Keynesian Models: A Critical Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 24(3), pages 539-572, July.
    5. Marco Guerrazzi, 2012. "Expectations, Employment and Prices: A Suggested Interpretation of the New «Farmerian» Economics," Politica economica, Società editrice il Mulino, issue 3, pages 369-395.
    6. Koursaros, Demetris, 2017. "Labor market dynamics when (un)employment is a social norm," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 96-116.

    More about this item

    Keywords

    unemployment fluctuations; labor productivity; search and matching model; New-Keynesian model;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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