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Unemployment Dynamics and Cyclical Fluctuations in the Icelandic Labour Market

  • Jósef Sigurdsson

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.

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Paper provided by Department of Economics, Central bank of Iceland in its series Economics with number wp56.

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Date of creation: Dec 2011
Date of revision:
Handle: RePEc:ice:wpaper:wp56
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  1. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  2. Blanchard, Olivier J & Galí, Jordi, 2008. "Labour Markets and Monetary Policy: A New Keynesian Model with Unemployment," CEPR Discussion Papers 6765, C.E.P.R. Discussion Papers.
  3. Michael Elsby & Bart Hobijn & Aysegul Sahin, 2008. "Unemployment Dynamics in the OECD," NBER Working Papers 14617, National Bureau of Economic Research, Inc.
  4. Mark Gertler & Antonella Trigari, 2006. "Unemployment Fluctuations With Staggered Nash Wage Bargaining," NBER Working Papers 12498, National Bureau of Economic Research, Inc.
  5. Cho, J-O. & Cooley, T.F., 1988. "Employment And Hours Over The Business Cycle," Papers 88-03, Rochester, Business - General.
  6. Gomes, Pedro, 2009. "Labour market flows: facts from the United Kingdom," Bank of England working papers 367, Bank of England.
  7. Michael R. Darby & John Haltiwanger & Mark Plant, 1984. "Unemployment-Rate Dynamics and Persistent Unemployment Under RAtional Expectations," UCLA Economics Working Papers 339, UCLA Department of Economics.
  8. Rogerson, Richard & Shimer, Robert, 2011. "Search in Macroeconomic Models of the Labor Market," Handbook of Labor Economics, Elsevier.
  9. Shigeru Fujita & Garey Ramey, 2007. "The cyclicality of separation and job finding rates," Working Papers 07-19, Federal Reserve Bank of Philadelphia.
  10. Gary Solon & Ryan Michaels & Michael W. L. Elsby, 2009. "The Ins and Outs of Cyclical Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 84-110, January.
  11. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Working Papers 341, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  12. Smith, Jennifer, 2010. "The Ins and Outs of UK Unemployment," The Warwick Economics Research Paper Series (TWERPS) 944, University of Warwick, Department of Economics.
  13. 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.
  14. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  15. repec:bla:restud:v:61:y:1994:i:3:p:397-415 is not listed on IDEAS
  16. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  17. Robert Shimer, 2012. "Reassessing the Ins and Outs of Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 127-148, April.
  18. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
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