State Dependence in Labor Markets Fluctuations

Vol. 61, No. 3, p. 1027–1072

DOI: https://doi.org/10.1111/iere.12448

This article documents state dependence in labor market fluctuations. Using a Threshold Vector Autoregression (TVAR) model, we establish that the unemployment rate, the job separation rate, and the job‐finding rate (JFR) 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. We calibrate the model to match the standard deviation of the job‐transition rates explained by productivity shocks in the TVAR, and show that the model explains 88% of the state dependence in the unemployment rate, 76% for the separation rate and 36% for the JFR. The key channel underpinning state dependence in both job separation and JFRs is the interaction of the firm's reservation productivity level and the distribution of match‐specific idiosyncratic productivity. Results are robust across several variations to the baseline model.

 

Co-authors: Carlo Pizzinelli; Konstantinos Theodoridis

View Publication