State dependence in labor market fluctuations: evidence, theory, and policy implications

Carlo Pizzinelli, Konstantinos Theodoridis and Francesco Zanetti

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper documents state dependence in labor market fluctuations. Using a Threshold Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job finding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. The transition rates into and out of employment embed state dependence through the interaction of reservation productivity levels and the distribution of match-specific idiosyncratic productivity. State dependence implies that the effect of labor market reforms is different across phases of the business cycle. A permanent removal of layoff taxes is welfare enhancing in the long run, but it involves distinct short-run costs depending on the initial state of the economy. The welfare gain of a tax removal implemented in a low-productivity state is 4.9 percent larger than the same reform enacted in a state with high aggregate productivity.

Keywords: search and matching models; state dependence in business cycles; threshold vector autoregression. (search for similar items in EconPapers)
JEL-codes: C11 E24 E32 J64 (search for similar items in EconPapers)
Date: 2018-08
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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http://eprints.lse.ac.uk/90380/ Open access version. (application/pdf)

Related works:
Working Paper: State Dependence in Labor Market Fluctuations: Evidence, Theory, and Policy Implications (2019)
Working Paper: State Dependence in Labor Market Fluctuations: Evidence,Theory, and Policy Implications (2018)
Working Paper: State Dependence in Labor Market Fluctuations: Evidence, Theory, and Policy Implications (2018)
Working Paper: State Dependence in Labor Market Fluctuations: Evidence, Theory, and Policy Implications (2018)
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