Business Cycle, unemployment Trap and Effects of Economic Incentives on Job Finding Probability

Tomi Kyyrä, Pasi Holm and Juha Rantala

No 175, Discussion Papers from VATT Institute for Economic Research

Abstract: This paper considers the sensitivity of the household's disposable income with respect to the labour market states and the labour market transitions of unemployed workers. The paper analyses the following questions: (i) which are the determinants of starting wages? (ii) how many unemployed are in the unemployment trap? (iii) how do economic incentives affect the conditional probability of finding a job? (iv) how sensitive are answers to above questions with respect to business cycle? The empirical analysis is based on the individual panel data covering the years 1987-1993, when the unemployment rate rose from about 4 % to 18 %. We have estimated the starting wage equation to calculate the effects of hypothetical re-employment on the household's disposable income and to evaluate the frequency of the unemployment trap. To analyse factors affecting the transition out of unemployment to employment in open labour market, we estimate unemployment duration using a semi-parametric proportional risk model. The paper shows that the impact of the economic incentives, measured by the hypothetical change in household's disposable income, on re-employment is more important in the recession than in the boom.

Keywords: Business cycle; unemployment trap; job finding probability; Labour market; Työmarkkinat; Labor market and policies promoting economic growth; Työmarkkinat ja kasvua tukeva politiikka; C140 - Semiparametric and Nonparametric Methods; E300 - Prices; Business Fluctuations; and Cycles: General (includes measurement and data); J640 - Unemployment: Models; Duration; Incidence; and Job Search (search for similar items in EconPapers)
Date: 1998
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