Turbulence and unemployment in a job matching model

Wouter J. den Haan, Christian Haefke, Garey Ramey

Research output: Contribution to journalArticle

Abstract

According to Ljungqvist and Sargent (1998), high European unemployment since the 1980s can be explained by a rise in economic turbulence, leading to greater numbers of unemployed workers with obsolete skills. These workers refuse new jobs duetohighunemployment benefits. In this paper we reassess the turbulence-unemployment relationship using a matching model with endogenous job destruction. In our model, higher turbulence reduces the incentives of employed workers to leave their jobs. If turbulence has only a tiny effect on the skills of workers experiencing endogenous separation, then the results of Ljungqvist and Sargent (1998, 2004) are reversed, and higher turbulence leads to a reduction in unemployment. Thus, changes in turbulence cannot provide an explanation for European unemployment that reconciles the incentives of both unemployed and employed workers.

Original languageEnglish (US)
Pages (from-to)1360-1385
Number of pages26
JournalJournal of the European Economic Association
Volume3
Issue number6
DOIs
Publication statusPublished - Dec 1 2005

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ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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