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State Dependence in Labor Market Fluctuations: Evidence, Theory, and Policy Implications

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  • Carlo Pizzinelli

    (University of Oxford)

  • Konstantinos Theodoridis

    (Cardiff Business School)

  • Francesco Zanetti

    (University of Oxford (E-mail: Francesco.Zanetti@ economics.ox.ac.uk))

Abstract

This paper documents state dependence in labor market fluctuations. Using a Threshold Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job finding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. The transition rates into and out of employment embed state dependence through the interaction of reservation productivity levels and the distribution of match-specific idiosyncratic productivity. State dependence implies that the effect of labor market reforms is different across phases of the business cycle. A permanent removal of layoff taxes is welfare enhancing in the long run, but it involves distinct short-run costs depending on the initial state of the economy. The welfare gain of a tax removal implemented in a low- productivity state is 4.9 percent larger than the same reform enacted in a state with high aggregate productivity.

Suggested Citation

  • Carlo Pizzinelli & Konstantinos Theodoridis & Francesco Zanetti, 2019. "State Dependence in Labor Market Fluctuations: Evidence, Theory, and Policy Implications," IMES Discussion Paper Series 19-E-03, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:19-e-03
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    File URL: https://www.imes.boj.or.jp/research/papers/english/19-E-03.pdf
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    1. repec:eee:eecrev:v:110:y:2018:i:c:p:18-40 is not listed on IDEAS
    2. Gehrke, Britta & Weber, Enzo, 2018. "Identifying asymmetric effects of labor market reforms," European Economic Review, Elsevier, vol. 110(C), pages 18-40.

    More about this item

    Keywords

    Search and Matching Models; State Dependence in Business Cycles; Threshold Vector Autoregression;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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