Demand-driven job separation: reconciling search models with the ins and outs of unemployment

No 2009-24, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper presents a search model of unemployment with a new mechanism of job separation based on firms' demand constraints. The model is consistent with the cyclical behavior of labor market variables and can account for three stylized facts about unemployment that the Mortensen-Pissarides (1994) model has difficulties explaining jointly: (i) the unemployment-vacancy correlation is negative, (ii) the contribution of the job separation rate to unemployment fluctuations is small but non-trivial, (iii) movements in the job separation rate are sharp and short-lived while movements in the job finding rate are persistent. In addition, the model can rationalize two hitherto unexplained findings: why unemployment inflows were less important in the last two decades, and why the asymmetric behavior of unemployment weakened after 1985.

Keywords: Labor market; Unemployment (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-dge and nep-lab
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Citations: View citations in EconPapers (1)

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