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Uncertainty Shocks and Unemployment Dynamics

Author

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  • Kandoussi, Malak

    (University of Evry)

  • Langot, François

    (University of Le Mans)

Abstract

Recent events suggest that uncertainty changes play a major role in U.S. labor market fluctuations. This study analyzes the impact of uncertainty shocks on unemployment dynamics. Using a vector autoregression approach, we show that uncertainty shocks measured by stock market volatility have a significant impact on the U.S. unemployment rate. We then develop a quantitative version of the Diamond-Mortensen-Pissarides (DMP) model, in which uncertainty shocks hit the economy. Given the significant nonlinearities of the DMP model, we show that the introduction of uncertainty shocks not only allows this textbook model to account for observed characteristics of the U.S. labor market dynamics, with reasonable values for calibrated parameters, but also for the impact of rare episodes such as economic crises.

Suggested Citation

  • Kandoussi, Malak & Langot, François, 2020. "Uncertainty Shocks and Unemployment Dynamics," IZA Discussion Papers 13438, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp13438
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    References listed on IDEAS

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    Cited by:

    1. Kandoussi, Malak & Langot, François, 2020. "The Lockdown Impact on Unemployment for Heterogeneous Workers," IZA Discussion Papers 13439, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    uncertainty shocks; unemployment dynamics; search and matching; non-linearities;
    All these keywords.

    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

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