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The effects of productivity and benefits on unemployment: Breaking the link

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  • Brown, Alessio J. G.
  • Kohlbrecher, Britta
  • Merkl, Christian
  • Snower, Dennis J.

Abstract

In the standard macroeconomic search and matching model of the labor market, there is a tight link between the quantitative effects of (i) aggregate productivity shocks on unemployment and (ii) unemployment benefits on unemployment. This tight link is at odds with the empirical literature. We show that a two-sided model of labor market search where the household and firm decisions are decomposed into job offers, job acceptances, firing, and quits can break this link. In such a model, unemployment benefits affect households' behavior directly, without having to run via the bargained wage. A calibration of the model based on U.S. JOLTS data generates both a solid amplification of productivity shocks and a moderate effect of benefits on unemployment. Our analysis shows the importance of investigating the effects of policies on the households' work incentives and the firms' employment incentives within the search process.

Suggested Citation

  • Brown, Alessio J. G. & Kohlbrecher, Britta & Merkl, Christian & Snower, Dennis J., 2017. "The effects of productivity and benefits on unemployment: Breaking the link," FAU Discussion Papers in Economics 08/2017, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
  • Handle: RePEc:zbw:iwqwdp:082017
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    1. The effects of productivity and benefits on unemployment: Breaking the link
      by maximorossi in NEP-LTV blog on 2016-07-20 17:28:05

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    More about this item

    Keywords

    unemployment benefits; search and matching; aggregate shocks; macro models of the labor market;
    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
    • 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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