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Unemployment and Endogenous Reallocation over the Business Cycle

  • Carrillo-Tudela, Carlos

    ()

    (University of Essex)

  • Visschers, Ludo

    ()

    (University of Edinburgh)

We build an analytically and computationally tractable stochastic equilibrium model of unemployment in heterogeneous labor markets. Facing search frictions within markets and reallocation frictions between markets, workers endogenously separate from employment and endogenously reallocate between markets, in response to changing aggregate and local conditions. Empirically, using the 1986-2008 SIPP panels, we document the occupational mobility patterns of the unemployed, finding notably that occupational change of unemployed workers is procyclical. The heterogeneous-market model yields highly volatile countercyclical unemployment, and is simultaneously consistent with procyclical reallocation, countercyclical separations and a negatively-sloped Beveridge curve. Moreover, the model exhibits unemployment duration dependence, which (when calibrated to long-term averages) responds realistically to the business cycle, creating substantial longer-term unemployment in downturns. Finally, the model is also consistent with different employment and reallocation outcomes as workers gain experience in the labor market, on average and over the business cycle.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7124.

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Length: 84 pages
Date of creation: Jan 2013
Handle: RePEc:iza:izadps:dp7124
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