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Unemployment Dynamics and the Cost of Business Cycles

  • Hairault, Jean-Olivier

    ()

    (University of Paris 1 Panthéon-Sorbonne)

  • Langot, François

    ()

    (University of Le Mans)

  • Osotimehin, Sophie

    ()

    (CREST & University of Paris 1 Panthéon-Sorbonne)

In this paper, we investigate whether business cycles can imply sizable effects on average unemployment. First, using a reduced-form model of the labor market, we show that job finding rate fluctuations generate intrinsically a non-linear effect on unemployment: positive shocks reduce unemployment less than negative shocks increase it. For the observed process of the job finding rate in the US economy, this intrinsic asymmetry is enough to generate substantial welfare implications. This result also holds when we allow the job finding rate to be endogenous, provided the structural model is able to reproduce the volatility of the job finding rate. Moreover, the matching model embeds other non-linearities which alter the average job finding rate and so the business cycle cost.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3840.

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Length: 41 pages
Date of creation: Nov 2008
Date of revision:
Publication status: published in: Review of Economic Dynamics, 2010, 13(4), 759-779
Handle: RePEc:iza:izadps:dp3840
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  1. J. Bradford DeLong & Lawrence H. Summers, 1988. "How Does Macroeconomic Policy Affect Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 433-494.
  2. Dale T. Mortensen & Eva Nagypal, 2005. "More on Unemployment and Vacancy Fluctuations," NBER Working Papers 11692, National Bureau of Economic Research, Inc.
  3. Anne Epaulard & Aude Pommeret, 2003. "Recursive Utility, Endogenous Growth, and the Welfare Cost of Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 672-684, July.
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  5. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "Job reallocation, employment fluctuations and unemployment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 18, pages 1171-1228 Elsevier.
  6. repec:fth:harver:1418 is not listed on IDEAS
  7. Hagedorn, Marcus & Manovskii, Iourii, 2008. "The cyclical behavior of equilibrium unemployment and vacancies revisited," Working Paper Series 0853, European Central Bank.
  8. Gadi Barlevy, 2004. "The Cost of Business Cycles Under Endogenous Growth," American Economic Review, American Economic Association, vol. 94(4), pages 964-990, September.
  9. James S. Costain & Michael Reiter, 2003. "Business cycles, unemployment insurance and the calibration of matching models," Economics Working Papers 872, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2006.
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  14. Per Krusell & Anthony A. Smith, Jr., . "On the Welfare Effects of Eliminating Business Cycles," GSIA Working Papers 243, Carnegie Mellon University, Tepper School of Business.
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  16. Beaudry, Paul & Pages, Carmen, 2001. "The cost of business cycles and the stabilization value of unemployment insurance," European Economic Review, Elsevier, vol. 45(8), pages 1545-1572, August.
  17. Shigeru Fujita & Garey Ramey, 2007. "The cyclicality of separation and job finding rates," Working Papers 07-19, Federal Reserve Bank of Philadelphia.
  18. Philip Jung & Keith Kuester, 2008. "The (un)importance of unemployment fluctuations for welfare," Working Papers 08-31, Federal Reserve Bank of Philadelphia.
  19. Garey Ramey & Valerie A. Ramey, 1991. "Technology Commitment and the Cost of Economic Fluctuations," NBER Working Papers 3755, National Bureau of Economic Research, Inc.
  20. Harold L. Cole & Richard Rogerson, 1996. "Can the Mortonson-Pissarides matching model match the business cycle facts?," Staff Report 224, Federal Reserve Bank of Minneapolis.
  21. Tom Krebs, 2004. "Welfare Cost of Business Cycles When Markets Are Incomplete," Working Papers 2004-08, Brown University, Department of Economics.
  22. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
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