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The unemployment volatility puzzle: is wage stickiness the answer?

  • Christopher Pissarides

I study the cyclical behavior of an equilibrium search model with endogenous job creation and destruction, with focus the model’s failure to match the observed cyclical volatility of unemployment.. Job creation in the model is influenced by wages in new matches. I summarize microeconometric evidence on wages in new matches and show that the key model elasticities are consistent with the evidence. Therefore explanations of the unemployment volatility puzzle have to preserve the cyclical volatility of wages. I discuss some extensions of the model that can increase cyclical unemployment volatility through mechanisms other than wage stickiness.

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File URL: http://eprints.lse.ac.uk/4460/
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 4460.

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Length: 41 pages
Date of creation: 22 Nov 2007
Date of revision:
Handle: RePEc:ehl:lserod:4460
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