Abstract not found

In this paper, we extend the basic Mortensen-Pissarides search and matching model along two dimensions. First, we allow for ex-ante heterogeneity between workers. Second, two technology shocks, neutral and investment-specific, are the driving forces of the economy. Specifically, we integrate the framework of Krusell, Ohanian, Ríos-Rull, and Violante (2000)- a production function with capital-skill complementarity and two skill-groups- into a business-cycle search and matching model. We calibrate the model extending the approach in Hagedorn and Manovskii (2006) and find that the model accounts well for the cyclical behavior of labor market variables in the aggregate and for each demographic group. We show that the response of unemployment to changes in taxes or unemployment insurance benefits is substantially reduced in the model with worker heterogeneity.

In the 1970s, European unemployment started increasing. It increased further in the 1980s, to reach a plateau in the 1990s. It is still high today, although the average unemployment rate hides a high degree of heterogeneity across countries. The focus of researchers and policy makers was initially on the role of shocks. As unemployment remained high, the focus has progressively shifted to institutions. This paper reviews the interaction of facts and theories, and gives a tentative assessment of what we know and what we still do not know.

This paper theoretically and empirically documents a puzzle that arises when an RBC economy with a job matching function is used to model unemployment. The standard model can generate sufficiently large cyclical fluctuations in unemployment, or a sufficiently small response of unemployment to labor market policies, but it cannot do both. Variable search and separation, finite UI benefit duration, efficiency wages, and capital all fail to resolve this puzzle. However, either sticky wages or match-specific productivity shocks can improve the model’s performance by making the firm’s flow of surplus more procyclical, which makes hiring more procyclical too.

This paper presents an empirical analysis of unemployment patterns in the OECD countries from the 1960s to the 1990s. Our results indicate the following. First, broad movements in unemployment across the OECD can be explained by shifts in labour market institutions. Second, interactions between average values of these institutions and shocks make no significant additional contribution to our understanding of OECD unemployment changes.

Abstract We study the effects of oil price shocks on the creation and destruction of U.S. manufacturing jobs from 1972 to 1988. Oil shocks account for 20-25 percent of the variability in employment growth, twice as much as monetary shocks. The two-year employment response to an oil price increase rises (in magnitude) with capital intensity, energy intensity and product durability. Job destruction shows much greater short-run sensitivity to oil and monetary shocks than job creation except at young, small plants. Employment growth responds asymmetrically to oil price $ An early version of this paper was presented at the conference on ''International Energy Security: Economic Vulnerability to Oil Price Shocks'', sponsored by the Department of Energy and the Department of State and held in Washington, DC on October 3-4, 1996. We thank the conference participants and especially the organizers, Inja Paik and Don Jones, for helpful comments. Michael Horvath, our discussant at the NBER Economic Fluctuations Meeting in July 1997; provided especially careful and detailed comments on an earlier draft. Other useful comments came from the editors of this journal, the referees, and numerous conference and seminar participants. We also thank Pete Klenow for supplying data on product durability. Cathy

∗I have benefitted from the comments of numerous seminar participants. I am particularly grateful to Patrick Kehoe and Ellen McGrattan for comments, to Aspen Gorry for research assistance, and to the NSF for financial support. 1.

Employment protection legislation is generally blamed for reducing labour turnover and increasing the duration of unemployment. This paper argues that a proper evaluation of employment protection requires a model where there is need for it. The model in this paper gives an insurance role to employment protection in the absence of perfect insurance markets. It is shown that there is a role for both severance payments and advance notice of termination and that if they are chosen optimally, unemployment insurance does not in‡uence equilibrium employment. Simulations show that if employment protection is chosen optimally it does not reduce job creation. 1

Standard search and matching models of equilibrium unemployment, once properly calibrated, can generate only a small amount of frictional wage dispersion, i.e., wage differentials among ex-ante similar workers induced purely by search frictions. We derive this result for a specific measure of wage dispersion—the ratio between the average wage and the lowest (reservation) wage paid. We show that in a large class of search and matching models this statistic (the “mean-min ratio”) can be obtained in closed form as a function of observable variables (i.e., the interest rate, the value of leisure, and statistics of labor market turnover). Various independent data sources suggest that actual residual wage dispersion (i.e., inequality among observationally similar workers) exceeds the model’s prediction by a factor of 20. We discuss three extensions of the model (risk aversion, volatile wages during employment, and on-the-job search) and find that, in their simplest versions, they can improve its performance, but only modestly. We conclude that either frictions account for a tiny fraction of residual wage dispersion, or the standard model needs to be augmented to confront the data. In particular, the last generation of models with on-the-job search appears promising.

A search-theoretic model of equilibrium unemployment is constructed and shown to be consistent with the key regularities of the labor market and business cycle.