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Unemployment Dynamics and Cyclical Fluctuations in the Icelandic Labour Market

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  • Jósef Sigurdsson

Abstract

This paper studies business cycle dynamics in the Icelandic labour market with the focus on two separate but related dimensions. First, which margin for adjustment of labour input, the extensive margin or the intensive margin, accounts for more variation in total working hours? It finds that both margins are important. Variation in employment accounts for 56% of the overall variation in total hours while variation in hours per worker contributes 44% to variation in total hours. Second, which of the two unemployment transition rates, the separation rate or the job-finding rate, drives the observed fluctuations in unemployment, and how do these transition rates move over the business cycle? The results show that fluctuations in the separation rate explain 70% of the total variation in the unemployment rate. Both transition rates are highly cyclical. The procyclical job finding rate moves roughly contemporaneously with the cycle, while the countercyclical separation rate is found to lead the cycle.

Suggested Citation

  • Jósef Sigurdsson, 2011. "Unemployment Dynamics and Cyclical Fluctuations in the Icelandic Labour Market," Economics wp56, Department of Economics, Central bank of Iceland.
  • Handle: RePEc:ice:wpaper:wp56
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    References listed on IDEAS

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    Cited by:

    1. Jósef Sigurdsson & Rannveig Sigurdardottir, 2011. "Evidence of Nominal Wage Rigidity and Wage Setting from Icelandic Microdata," Economics wp55, Department of Economics, Central bank of Iceland.
    2. Olafsdottir, Katrin, 2020. "A deep recession came with deep wage cuts," Economics Letters, Elsevier, vol. 189(C).
    3. Bjarni G. Einarsson, 2015. "The Ins and Outs of Icelandic Unemployment," Economics wp69, Department of Economics, Central bank of Iceland.
    4. Bjarni G. Einarsson & Jósef Sigurdsson, 2013. "How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland," Economics wp64, Department of Economics, Central bank of Iceland.

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