Jobless recoveries: The interaction between financial and search frictions

Abstract

This paper establishes a link between labor market frictions and financial market frictions. We argue that this link had large effects on labor market outcomes and helps to explain the jobless recovery. We build a stylized DSGE model that features this channel. We use Bayesian methods to estimate the model on U.S. data. We show that the model with this channel generates a strong internal propagation mechanism, replicates stylized labor market effects of the Great Recession, and, most importantly, creates a jobless recovery. Further, our results show that recessions generated by financial shocks have the largest effect on the efficiency of the labor market compared to demand-side and other supply-side recessions.