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State dependence in labour market fluctuations

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Download PDF: Working Paper 47


This paper shows that labour market variables respond in a significantly different way to the same productivity shocks across different phases of the business cycle.

Authors: Carlo Pizzinelli (IMF), Konstantinos Theodoridis (ESM), Francesco Zanetti (University of Oxford)



This paper documents state dependence in labour market fluctuations. Using a Threshold Vector Autoregression model (TVAR), 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. We calibrate the model to match the standard deviation of the job-transition rates explained by productivity shocks in the TVAR, and show that the model explains 88 percent of the state dependence in the unemployment rate, 76 percent for the separation rate and 36 percent for the job finding rate. The key channel underpinning state dependence in both job separation and job finding rates is the interaction of the firm's reservation productivity level and the distribution of match-specific idiosyncratic productivity. Results are robust across several variations to the baseline model.

Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.

Keywords: Search and Matching Models, State Dependence in Business Cycles, Threshold Vector Autoregression

JEL codes: E24, E32, J64, C11

Source: European Stability Mechanism | Working Paper Series | Volume 2020 | No 47 | December 2020 | 68 Pages

Copyright © European Stability Mechanism, 2020 | All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the European Stability Mechanism.