The (un)importance of unemployment fluctuations for welfare

Philip Jung () and Keith Kuester

No 08-31, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper develops a real business cycle model with labor market search and matching frictions, which endogenously links both the cyclical fluctuations and the mean level of unemployment to the aggregate business cycle risk. The key result of the paper is that business cycles are costly for all consumers, regardless of their wealth, yet that unemployment fluctuations themselves are not the source of these costs. Rather fluctuations over the cycle induce higher average unemployment rates as employment is non-linear in job-finding rates and past unemployment. The authors first show this result analytically in special cases. They then calibrate a general equilibrium model with risk-averse asset-holding and liquidity-constrained workers to US data. Also under these more general circumstances, business cycles mean higher unemployment for all workers. The ensuing costs of cycles rise further for liquidity-constrained agents when replacement rates are lower or when workers' skills depend on the length of (un)employment spells.

Keywords: Unemployment; Welfare; Business cycles (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... rs/2008/wp08-31r.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:08-31

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().