Unemployment and Endogenous Reallocation over the Business Cycle

Carlos Carrillo-Tudela and Ludo Visschers

No 2015-35, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: This paper studies unemployed workers decisions to change occupations, and their impact on fluctuations in aggregate unemployment and its underlying duration distribution. We develop an analytically and computationally tractable stochastic equilibrium model with heterogenous labor markets. In this model three different types of unemployment arise: search, rest and reallocation unemployment. We document new evidence on unemployed workers gross occupational mobility and use it to calibrate the model. We show that rest unemployment is the main driver of unemployment fluctuations over the business cycle and causes cyclical unemployment to be highly volatile. The resulting unemployment duration distribution generated by the model responds realistically to the business cycle, creating substantial longer-term unemployment in downturns. Finally, rest unemployment also makes our model simultaneously consistent with procyclical occupational mobility of the unemployed, countercyclical job separations into unemployment and a negatively-sloped Beveridge curve.

Keywords: unemployment; business cycle; rest; search; occupational mobility (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (25)

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Working Paper: Unemployment and endogenous reallocation over the business cycle (2013)
Working Paper: Unemployment and Endogenous Reallocation over the Business Cycle (2013)
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