Unemployment Volatility in a Behavioural Search Model

Christopher Martin and Bingsong Wang

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

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

Keywords: behavioural economics; search frictions; unemployment volatilty (search for similar items in EconPapers)
JEL-codes: E23 E32 J23 J30 J64 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-dge, nep-lab, nep-mac and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1179

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