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Endogenous separation, wage rigidity and the dynamics of unemployment

Daniel Tortorice ()

Journal of Macroeconomics, 2013, vol. 38, issue PB, 179-191

Abstract: Previous attempts to evaluate the Mortensen–Pissarides model rely on either endogenous separation or wage rigidity. In this paper I simulate a version of the Mortensen–Pissarides (MP) model with wage rigidity and endogenous separation. The model is then able to answer a key question in the literature: can wage rigidity and endogenous separation explain the joint dynamics of unemployment, vacancies and wages? I find that it can. The model generates sufficient volatility in unemployment, the separation rate and the finding rate, 75% of the observed volatility in vacancies, and 70% of the Beveridge curve (the negative correlation between unemployment and vacancies). More substantially, the model matches the volatility of the average wage and generates a response of new hires’ wages to productivity and unemployment consistent with key estimates in the literature. I then simulate the model while restricting the separation rate to be constant and show that the model predicts only 70% of the variance of unemployment. I conclude that finding rate fluctuations explain 70% of unemployment fluctuations halfway in between the most prominent estimates in the literature.

Keywords: Unemployment; Search models; Business cycles (search for similar items in EconPapers)
JEL-codes: E24 E32 J64 (search for similar items in EconPapers)
Date: 2013
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Working Paper: Endogenous Separation, Wage Rigidity and the Dynamics of Unemployment (2010) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:38:y:2013:i:pb:p:179-191

DOI: 10.1016/j.jmacro.2013.06.002

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