Finance and Economics Discussion Series (FEDS)
June 2009
Demand-driven Job Separation: Reconciling Search Models with the Ins and Outs of Unemployment
Regis Barnichon
Abstract:
This paper presents a search model of unemployment with a new mechanism of job separation based on firms' demand constraints. The model is consistent with the cyclical behavior of labor market variables and can account for three stylized facts about unemployment that the Mortensen-Pissarides (1994) model has difficulties explaining jointly: (i) the unemployment-vacancy correlation is negative, (ii) the contribution of the job separation rate to unemployment fluctuations is small but non-trivial, (iii) movements in the job separation rate are sharp and short-lived while movements in the job finding rate are persistent. In addition, the model can rationalize two hitherto unexplained findings: why unemployment inflows were less important in the last two decades, and why the asymmetric behavior of unemployment weakened after 1985.
Full paper (Screen Reader Version)Keywords: Search and matching model, gross worker flows, job finding rate, employment exit rate
PDF: Full Paper
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