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Unemployment Dynamics and the Cost of Business Cycles

Jean-Olivier Hairault, Francois Langot and Sophie Osotimehin

No 3840, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: In this paper, we investigate whether business cycles can imply sizable effects on average unemployment. First, using a reduced-form model of the labor market, we show that job finding rate fluctuations generate intrinsically a non-linear effect on unemployment: positive shocks reduce unemployment less than negative shocks increase it. For the observed process of the job finding rate in the US economy, this intrinsic asymmetry is enough to generate substantial welfare implications. This result also holds when we allow the job finding rate to be endogenous, provided the structural model is able to reproduce the volatility of the job finding rate. Moreover, the matching model embeds other non-linearities which alter the average job finding rate and so the business cycle cost.

Keywords: unemployment dynamics; business cycle costs (search for similar items in EconPapers)
JEL-codes: E32 J64 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2008-11
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 (9)

Published - published in: Review of Economic Dynamics, 2010, 13(4), 759-779

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Working Paper: Unemployment dynamics and the cost of business cycles (2009) Downloads
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