Unemployment Pool Research Articles

Monetary Shocks in a Model with Skill Loss

Unemployment shows persistent and long‐lasting responses to nominal and real shocks. Standard real business cycle models with search frictions but a homogeneous labor force are able to generate some volatility and persistence, but not enough to match the empirical evidence. Moreover, empirical studies emphasize the importance of the heterogeneity of the unemployment pool to fully understand unemployment dynamics. In particular, in most European countries the incidence of long‐term unemployment is large and well known. One of the possible causes/consequences of long‐term unemployment is the skill deterioration of the unemployment pool. In this paper, we introduce the skill loss mechanism, and therefore a heterogeneous labor force, in a New Keynesian framework with search frictions. Calibrating the model for the Spanish economy, we show that while the skill loss mechanism helps to explain the magnitude of the response of unemployment to monetary shocks, it does not improve the performance of the homogeneous worker model in terms of the persistence of the response, especially for short‐ and long‐term unemployment.

Job to Job Movements in a Simple Search Model

On the job search is a key feature of real life labor markets. Yet, traditional equilibrium unemployment theory has not been able to account for on-thejob search in a satisfactory manner. In this paper we present an equilibrium model which includes on-thejob search as an optimal response to search frictions and differences in firm productivity. Our model is laid out in detail in ongoing research by Garibaldi and Moen (2009). In our model, on-the-job search is an optimal response to firm heterogeneity and search frictions in the labor market. The model has three key elements. First, it applies the competitive search equilibrium concept, initially proposed by Moen (1997). Thus, firms post wages and vacancies to minimize search and waiting costs, and the labor market is endogenously separated into submarkets. Second, firms have convex costs of maintaining vacancies (in our simulations, the number of vacancies per firm is fixed). Third, contracting between a firm and its employees is efficient, so that their joint income is maximized. The model tends toward an equilibrium characterization in which there is a job ladder in the labor market. Low productivity firms pay low wages, face high turnover rates, grow slowly and hire directly from the unemployment pool. More efficient firms pay higher wages, grow more quickly and hire from the employment pool. This characterization is qualitatively consistent with a variety of stylized facts about industry dynamics and worker ows: 1) workers move from low-wage to high-wage occupations, 2) more productive firms are larger and pay higher wages than less productive firms, 3) job-to-job mobility falls with average firm size and worker tenure, 4) wages increase with firm size, and 5) wages are higher in fast-growing firms. We also show that compared to traditional labor market models, our equilibrium model with on-thejob search delivers unexpected effects, even though

Business Volatility, Job Destruction, and Unemployment

Unemployment inflows fell from 4 percent of employment per month in the early 1980s to 2 percent or less by the mid 1990s and thereafter. U.S. data also show a secular decline in the job destruction rate and the volatility of firm-level employment growth rates. We interpret this decline as a decrease in the intensity of idiosyncratic labor demand shocks, a key parameter in search and matching models of unemployment. According to these models, a lower intensity of idiosyncratic shocks produces less job destruction, fewer workers flowing through the unemployment pool and less frictional unemployment. To evaluate the importance of this theoretical mechanism, we relate industry-level unemployment flows from 1977 to 2005 to industry-level indicators for the intensity of idiosyncratic shocks. Unlike previous research, we focus on the lower frequency relationship of job destruction and business volatility to unemployment flows. We find strong evidence that declines in the intensity of idiosyncratic labor demand shocks drove big declines in the incidence and rate of unemployment. This evidence implies that the unemployment rate has become much less sensitive to cyclical movements in the job-finding rate.

Vacancies and Unemployment

Expansions are usually associated with plentiful vacancies and a low number of unemployed workers. During recessions the unemployment pool swells while employers seek to fill fewer job openings.

Matching with interviews

This paper explores how interviews affect the matching process when worker productivity is private information. Wages are determined by a single round of strategic bargaining after the worker is interviewed. The implications of this hiring process for the efficiency of matching and the incidence and severity of statistical discrimination are considered. The better are firms at identifying productive workers the worse the average quality of the unemployment pool so interviewing tends to slow down matching for every one. Multiple Pareto rankable equilibria are possible such that any social group in a “bad” equilibrium faces stricter hiring standards, longer spells of unemployment and lower welfare.

Elements of a Radical Counter-movement to Neoliberalism: Employment-led Development

After highlighting the failure of mainstream economic theory in dealing with the rising global inequality and economic struggles brought about by neoliberal economic policies, the paper presents the outline of an alternative policy proposal to create full employment and price stability, and to restore financial sovereignty to developing countries. Under the Employer of Last Resort (ELR) program, the government guarantees employment to all through a decentralized community-based job creation policy. Projects are selected by local community groups based on community needs and the availability of skills in the unemployment pool. Funding is provided by a central/federal fiscal authority and requires policy coordination with the central bank.

How Tight is the Labour Market?

We decompose variations in the aggregate exit rate from unemployment to employment into two factors: i) Changes in the arrival rate of acceptable job offers; and ii) changes in the composition of the unemployment pool in terms of average employability. We argue that the former of these factors provides the basis for an informative labour market tightness indicator, while the latter yields valuable information regarding the design of optimal labour market policies across the cycle. Based on Norwegian register data, we find that individual monthly exit rates tend to double from a cyclical trough to a cyclical peak, ceteris paribus, but that crosssectional heterogeneity nevertheless explains 88 per cent of the overall variation in individual monthly exit probabilities during the period from 1989 to 2002.

Testing and the Composition of the Labor Pool

AbstractWe consider a continuous‐time labor matching model with endogenous separation. Firms initially lack information about the quality of workers with whom they are matched. They acquire information both from pre‐employment testing and, in the case in which a labor relationship is established, on‐the‐job performance. Testing provides a signal of a worker's quality. A firm can pick the accuracy level of its test, but it pays a cost that increases in the accuracy. Workers who perform poorly on the test are not offered employment; those who perform poorly on the job are eventually fired (after some delay). Worker quality is not match‐specific; low‐quality workers are less productive with all firms. We show that, in equilibrium, there is an inverse and complementary relation between the level of testing that firms optimally perform and the overall quality of the workers in the matching pool. We consider the properties of a steady‐state, stable equilibrium in such an environment. The complementarity between testing and the composition of the unemployed pool introduces the possibility of multiple equilibria.

Labour market flows and adjustment to macroeconomic shocks in the Baltic States

This article presents a comparison of worker flows in all three Baltic labour markets before and after the 1998 Russian crisis. Our evidence helps us to understand the micro impacts of macroeconomic shocks in the late‐transition countries and sheds light on labour market flexibility in the Baltic states. While there has been much research on the labour markets of transition economies, including Estonia, the other two Baltic economies have been largely left out so far. In spite of the common assumption viewing the three Baltic countries as one homogeneous group, we find the Russian crisis had dramatically different effects across the three labour markets. As a result of the crisis, the Estonian outflow from unemployment declined and the unemployment pool became more stagnant. In contrast, in Latvia the unemployment outflow remained relatively high, but there was an increase in the inflow to inactivity. One explanation for this situation in Latvia, where unemployment has been substantially higher than in Estonia, is that the macroeconomic shock resulted in widespread worker discouragement.

The economics of ‘new blood’

We construct a dynamic general-equilibrium model of search and matching where public knowledge grows through time and workers accumulate a fraction of this knowledge through education/retraining. Due to search delays, the unemployment pool is populated by vintages of workers of differing productivities. Through intergenerational rivalry, the human capital of older generations is rendered obsolete relative to that of the new blood. Higher knowledge growth exacerbates intergenerational competition, thereby lowering education and growth while raising unemployment and inequality. These findings help explain wage compression/expansion and the hump-shaped wage-tenure profile across cohorts.

The Impact of a Customs Union with the European Union on Internal Migration in Turkey

Abstract The impact of the recent Customs Union (CU) agreement between Turkey and the European Union on internal migration is studied using an intra‐industry trade Computable General Equilibrium (CGE) model with intersectoral capital mobility under two alternative specifications for the labor market: the traditional Harris‐Todaro approach and the existence of a “wage curve” in the urban sector. Under both specifications, the numerical results show that the CU is welfare enhancing and causes a reduction of the urban‐rural wage gap as suggested by theoretical studies. At the same time, it leads to rural‐to‐urban migration and raises the capital rent, results that are counter intuitive with respect to the dual economy literature. Furthermore, the rise in formal labor demand and the migration response to the CU have not resulted in an increase in urban unemployment (i.e. the “Todaro paradox”), but rather to a fall in the unemployment pool. The study also shows that the Bhagwati‐Srinivasan proposal of maximizing welfare by uniformly subsidizing the entire labor market is impracticable, especially if the high wage union sector can negotiate employment conditions.

Unemployment Equilibrium and On-the-Job Search

This paper uses the search and matching framework to explore the impact of employed job search on the labour market. The specific features of our model are endogenous employed job search, flows in and out of the labour force, endogenous job destruction and heterogenous job creation. Also, job flows and workers flows do not coincide as we allow for job-to-job flows and labour force entries and exits. Employed job search is shown to have a substantial impact on unemployment dynamics but a negligible one on the level of unemployment. More on-the-job search leads to lower unemployment inflow and outflow, i.e. a more stagnant unemployment pool. With employed job search, the stock of vacancies is more cyclically sensitive, the unemployment outflow less cyclically sensitive and the unemployment inflow more cyclically sensitive than without employed job search. With our model, the impact of a change in unemployment benefit does not only occur through the conventional decrease in the unemployment outflow rate, but also through an increase in the unemployment inflow rate. The calibrated version of our model replicates well the cyclical behaviour of job and worker flows observed in the data.

Unemployment Determinants for Women in Spain

Spain has one of the highest rates of unemployment among OECD countries. Some explanations for this stress the importance of unemployment duration compared with entry rates to the unemployment pool. Long‐term unemployment rates are particularly high among women in Spain. The object of this paper is to investigate the determinants of unemployment duration among women. It will consider personal characteristics (education and age), family background, socio‐economic variables (the number of household earners and household income) and the effect of unemployment benefits, using data from the Household Expenditure Survey 1990–91.

Does unemployment cause unemployment? Micro evidence from Norway

The way that unemployment duration affects employment prospects, is investigated using Norwegian micro transition data encompassing detailed accounts of 14 807 unemployed adults. A generalized non-proportional Weibull model is estimated, with two possible exits from the unemployment pool: a job or a labour force exit. On average the probability of obtaining a job is fairly constant at the individual level, while the probability of exiting the labour force increases significantly as unemployment duration is prolonged. For some particular groups of unemployed, there is also a marked negative duration dependence in the probability of obtaining a job.

Adverse Selection and Employment Cycles

This article examines a dynamic adverse‐selection model that generates equilibrium employment cycles. In the model, firms hire workers from unemployment, observe workers' productivity through time, and (following the profit‐maximizing rule) eventually fire unproductive workers. If hiring costs are low, the dynamical system converges to a steady state in which the unemployment pool contains mostly low‐ability workers. However, if hiring costs are sufficiently large, this “lemons effect” would make firms unwilling to hire workers. In this case, the system converges to a cyclical equilibrium in which firms alternate between hiring and not hiring.

Labour Market Gross Flows and Transition Rates 1980–1992

AbstractThis paper examines the cyclical properties of gross flows and transition rates between the alternative labour market states of ‘employed’, ‘unemployed’, and ‘not in labour force’ for Australian workers for the period 1980–1992. The study is based on ABS monthly gross flow data, disaggregated by gender, and with the employment status disaggregated into part-time and full-time work. The principal finding is that the somewhat surprising pattern, of counter-cyclical monthly flows from unemployment to employment, is primarily the result of counter-cyclical male transitions to full time employment. The results are compared with those from European empirical studies. The paper also considers the consistency of the results with thé implications of theoretical models which emphasise the counter-cyclical ‘quality’ of the unemployment pool.

Heterogeneous workers, economic transformation and the stagnancy of transitional unemployment

In an environment of intense structural change being unemployed conveys a bad signal. A simple model is developed which accounts for the stagnancy of the unemployment pool in transitional economies in spite of major worker reallocation occurring in these countries. The model predicts that the tightening of unemployment benefits can hardly boost outflows to jobs once mass unemployment has built-up as there are at this stage too many low-productivity workers in the pool. The implications of the model are consistent with evidence on gross job flows, wage differentials, and the effects of the tightening of unemployment benefit systems in Eastern Europe.

Incidence and duration of unemployment in Romania

The paper highlights the main characteristics of registered unemployment in Romania using a large sample of microdata (11,504 individual observations). First, we examine the composition of the unemployment pool, as well as the elapsed unemployment duration along different dimensions. Second, we present some characteristics of experienced workers, whose narrow specific skills make them one of, if not the most, vulnerable categories in the unavoidable process of labour reallocation. 1 1 A detailed analysis of the determinants of unemployment duration in Romania is presented by the authors in the forthcoming ‘ Unemployment Duration, Specific Training, and the Political Economy of Labor Adjustments’.

Henry Phelps Brown on Wages, Productivity and the Wage Share

Henry Phelps Brown was labour economist who brought his historian's training to the empirical analysis of wages, productivity and the wage share, for several countries, over a lengthy time-span. He pointed out the relationship between the rate of money wage increase and the level of unemployment eight years before the Philips Curve was published. Significantly through, Phelps Brown rejected any causal connection that would justify the creation of an unemployment pool as an anti-inflationary policy. His ‘climacteric’ thesis attributed the productivity slow-down in the late nineteenth century to an exhaustion of the innovatory potential deriving from steam and steel. He produced the definitive critique of the empirical applications of the Cobb-Douglas production function, although he subsequently made use of its as a theoretical tool to explain the ‘stylized facts’ which his empirical investigations produced. Phelps Brown attributed the stable trends in the profit rate, the profits share and the capital-output ratio to neutrality of invention, in association with the importance of convenction to entrepreneurial behaviour when the future is uncertain. Displacements in the trend of income shares were accounted for by entrepreneurial convention being shattered by the joint actions of trade unions and the product ‘market environment’. Phelps Brown's dedication to examining and explaining the historical record of wages, productivity and the wage share has received critical acclaim from both economic theorists and economic historians.

Unemployment Dynamics in New Zealand 1985-1994

The quarterly change in the number of unemployed New Zealanders is usually quite small relative to the total number of people unemployed. For the year ended September 1994, for example, the absolute average quarterly change in Household Labour Force Survey (HLFS) unemployment was 10,500 people against a quarterly average unemployment pool of 145,000 people. These relatively small stock changes, however, conceal the much larger flows into and out of unemployment of possibly 70,000 people during each quarter of 1993194. The scale of these flows, and the associated probabilities of entering and leaving unemployment, are not widely known. Using data from the HLFS, this paper updates and extends the relatively small amount of New Zealand research on labour market dynamics. It begins with a definition and data on the unemployment stock-flow relationship in New Zealand. This is followed by a brief analysis of the flows between the major labour market states and the associated flow rates and cycles. The paper will indicate how gross flows data can be used to give insights into gender and age differences in unemployment and 'steady-state' outcomes. The accuracy of gross flows data and the formal modelling of unemployment inflows and outflows are on-going projects.