Unemployment and Endogenous Reallocation over the Business Cycle

Carlos Carrillo-Tudela

No 1045, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: This paper builds an analytically and computationally tractable stochastic equilibrium model of unemployment with heterogeneous labor markets. Unemployment is caused and affected by search frictions within markets and reallocation frictions across markets. We use this model to study quantitatively the relation between heterogeneity in labor market conditions across occupations, the cyclical patterns of unemployed workers' occupational (im)mobility, and overall aggregate fluctuations in unemployment. Empirically, using the 1986-2008 SIPP panels, we document the occupational mobility patterns of the unemployed, finding notably that occupational change of unemployed workers is procyclical. Theoretically, we find also the latter to be the constrained efficient pattern. Calibrating the heterogeneous-market model yields highly volatile countercyclical unemployment, and is simultaneously consistent with procyclical reallocation, countercyclical separations, a clear Beveridge curve, and unemployment duration dependence. Due to the model's tractability, we can derive many of these results analytically. We decompose unemployment into the underlying search, reallocation and rest components.

Date: 2012
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