Revisiting the Hypothesis of High Discounts and High Unemployment

Paolo Martellini, Guido Menzio and Ludo Visschers

No 12441, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We revisit the hypothesis that labor market fluctuations are driven by shocks to the discount rate. Using a model in which the UE and the EU rates are endogenous, we show that an increase in the discount rate leads to a decline in both the UE and the EU rates. In the data, though, the UE and EU rates move against each other at business cycle frequency. Using a lifecycle model with human capital accumulation on the job, we show that an increase in the discount rate does indeed lead to a decline in the aggregate UE rate and to an increase in the aggregate EU rate. However, the decline in the UE rate is larger for younger workers than for older workers and the EU rate increases only for younger workers. In the data, fluctuations in the UE and EU rates at the business cycle frequency are nearly identical across age groups.

Keywords: human capital; discount rate; unemployment fluctuations; lifecycle earnings (search for similar items in EconPapers)
JEL-codes: E24 J63 J64 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2019-06
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 (2)

Published - published in: Economic Journal, 2021, 131 (637), 2203-2232.

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Related works:
Journal Article: Revisiting the Hypothesis of High Discounts and High Unemployment (2021)
Working Paper: Revisiting the Hypothesis of High Discounts and High Unemployment (2020)
Working Paper: Revisiting the Hypothesis of High Discounts and High Unemployment (2020)
Working Paper: Revisiting the Hypothesis of High Discounts and High Unemployment (2019)
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