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The Dark Corners of the Labor Market

Vincent Sterk

No 1603, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: Standard models predict that episodes of high unemployment are followed by recoveries. This paper shows, by contrast, that a large shock may set the economy on a path towards very high unemployment, with no recovery in sight. First, I estimate a reduced-form model of flows in the U.S. labor market, allowing for the possibility of multiple steady states. Next, I estimate a non-linear search and matching model, in which multiplicity of steady states may arise due to skill losses upon unemployment, following Pissarides (1992). In both cases, estimates imply a stable steady state with around 5 percent unemployment and an unstable one with around 10 percent unemployment. The search and matching model can explain observed job finding rates remarkably well, due to its strong endogenous persistence mechanism.

Keywords: Unemployment; Multiple Steady States; Non-linear Estimation (search for similar items in EconPapers)
JEL-codes: E24 E32 J23 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2016-01
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
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