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Unemployment Volatility in a Behavioural Search Model

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  • Martin, Chris

    (University of Bath)

  • Wang, Bingsong

    (University of Warwick)

Abstract

Recent evidence that the opportunity cost of employment is pro cyclical implies that existing models based around search frictions in the labour market cannot match the large volatilities of unemployment and vacancies observed in the data. In this paper, we incorporate insights from behavioural economics into the search frictions framework. The resultant model can match observed volatilities even if the opportunity cost is strongly pro cyclical. The key mechanism in the model is that the pro-cyclicality of the opportunity cost has a limited impact on the reference wage of workers ; this feeds through into a limited volatility of the wage and so to a large unemployment volatility

Suggested Citation

  • Martin, Chris & Wang, Bingsong, 2018. "Unemployment Volatility in a Behavioural Search Model," The Warwick Economics Research Paper Series (TWERPS) 1179, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1179
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    More about this item

    Keywords

    behavioural economics ; search frictions ; unemployment volatilty;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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