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Job Uncertainty and Deep Recessions

Author

Listed:
  • Morten O. Ravn

    (Department of Economics University College London (UCL)
    Centre for Macroeconomics (CFM)
    Centre for Economic Policy Research (CEPR))

  • Vincent Sterk

    (Department of Economics University College London (UCL)
    Centre for Macroeconomics (CFM))

Abstract

We study a model in which households are subject to uninsurable idiosyncratic employment shocks, firms set prices subject to nominal rigidities, and the labor market is characterized by matching frictions and by downward in flexible wages. We introduce heterogeneity in search efficiency that arises either upon job loss or during an unemployment spell. Higher risk of job loss and worsening job finding prospects during unemployment depress goods demand because of a precautionary savings motive amongst employed households. Lower goods demand produces a decline in job vacancies and the ensuing drop in the job finding rate in turn triggers higher precautionary saving setting in motion an amplification mechanism. The amplification mechanism is absent from standard macroeconomic models and depends on the combination of incomplete financial markets and frictional goods and labor markets. The model can account for key features of the Great Recession in response to the observed changes in the job separation rate and an increase in search efficiency heterogeneity estimated from the matching function.

Suggested Citation

  • Morten O. Ravn & Vincent Sterk, 2012. "Job Uncertainty and Deep Recessions," Discussion Papers 1501, Centre for Macroeconomics (CFM), revised Dec 2014.
  • Handle: RePEc:cfm:wpaper:1501
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    References listed on IDEAS

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    More about this item

    Keywords

    Job Uncertainty; Unemployment; Incomplete Markets;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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