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State dependence in labor market fluctuations: evidence, theory, and policy implications

Pizzinelli, Carlo, Theodoridis, Konstantinos and Zanetti, Francesco (2018) State dependence in labor market fluctuations: evidence, theory, and policy implications. CFM Discussion Paper Series (CFM-DP2018-22). Centre For Macroeconomics, London School of Economics and Political Science, London, UK.

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Abstract

This paper documents state dependence in labor market fluctuations. Using a Threshold Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job finding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. The transition rates into and out of employment embed state dependence through the interaction of reservation productivity levels and the distribution of match-specific idiosyncratic productivity. State dependence implies that the effect of labor market reforms is different across phases of the business cycle. A permanent removal of layoff taxes is welfare enhancing in the long run, but it involves distinct short-run costs depending on the initial state of the economy. The welfare gain of a tax removal implemented in a low-productivity state is 4.9 percent larger than the same reform enacted in a state with high aggregate productivity.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2018 Centre for Macroeconomics
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C11 - Bayesian Analysis
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E24 - Macroeconomics: Employment; Unemployment; Wages; Intergenerational Income Distribution (includes wage indexation)
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J64 - Unemployment: Models, Duration, Incidence, and Job Search
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 05 Oct 2018 15:36
Last Modified: 12 Mar 2019 00:03
URI: http://eprints.lse.ac.uk/id/eprint/90380

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