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Turbulence and Unemployment in Matching Models

Author

Listed:
  • Thomas Sargent

    (New York University)

  • Lars Ljungqvist

    (Stockholm School of Economics)

  • Isaac Baley

    (Universitat Pompeu Fabra & Barcelona GSE)

Abstract

Ljungqvist and Sargent (2007) show that increases in turbulence, in the sense of worse skill transition probabilities for workers who suffer involuntary layoffs, generate higher unemployment in a welfare state. den Haan, Haefke and Ramey (2005) challenge this finding and argue that if turbulence also exposes voluntary quits to a tiny risk of skill loss, then higher turbulence leads to a reduction in unemployment. In this paper we explore the source of these disparate results within the two adopted matching models. We find that the latter authors' assumption of additional exposure of the high-skilled unemployed to skill losses following unsuccessful job market encounters, together with the parameterization of their model, implies small incentives for labor mobility in tranquil times. Hence, any small cost to mobility would cause voluntary separations to shut down, e.g., tiny government mandated layoff costs would have counterfactually large effects of suppressing unemployment. Once the additional exposure to turbulence is dismissed and the parameterization is adjusted to account for the unemployment dynamics in data, the positive relationship between turbulence and unemployment reemerges.

Suggested Citation

  • Thomas Sargent & Lars Ljungqvist & Isaac Baley, 2017. "Turbulence and Unemployment in Matching Models," 2017 Meeting Papers 1391, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1391
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    References listed on IDEAS

    as
    1. Lars Ljungqvist, 2002. "How Do Lay--off Costs Affect Employment?," Economic Journal, Royal Economic Society, vol. 112(482), pages 829-853, October.
    2. Den Haan, Wouter & Haefke, Christian & Ramey, Gary, 2001. "Shocks and Institutions in a Job Matching Model," CEPR Discussion Papers 2970, C.E.P.R. Discussion Papers.
    3. Lars Ljungqvist & Thomas J. Sargent, 1998. "The European Unemployment Dilemma," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 514-550, June.
    4. J. J. McCall, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, Oxford University Press, vol. 84(1), pages 113-126.
    5. Wouter J. den Haan & Christian Haefke & Garey Ramey, 2005. "Turbulence And Unemployment In A Job Matching Model," Journal of the European Economic Association, MIT Press, vol. 3(6), pages 1360-1385, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    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
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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