State Dependence in Labor Market Fluctuations: Evidence, Theory, and Policy Implications
Francesco Zanetti () and
Konstantinos Theodoridis ()
No 856, Economics Series Working Papers from University of Oxford, Department of Economics
This paper documents state dependence in labor market ï¬‚uctuations. Using a Threshold Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job ï¬ nding 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-speciï¬ c idiosyncratic productivity. State dependence implies that the eï¬€ect of labor market reforms is diï¬€erent across phases of the business cycle. A permanent removal of layoï¬€ 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: E24 E32 J64 C11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
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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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