DP2970 Shocks and Institutions in a Job Matching Model

Author(s): Wouter Den Haan, Christian Haefke, Gary Ramey
Publication Date: September 2001
Keyword(s): job matching model, TFP slowdown, turbulence, unemployment, unemployment benefits
JEL(s): E24, J64
Programme Areas: International Macroeconomics, Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2970

This Paper explains the divergent behaviour of European and US unemployment rates using a job market-matching model of the labour market with an interaction between shocks and institutions. It shows that a reduction in TFP growth rates, an increase in real interest rates, and an increase in tax rates leads to a permanent increase in unemployment rates when the replacement rates or initial tax rates are high, while no increase in unemployment occurs when institutions are ‘employment friendly.’ The Paper also shows that an increase in turbulence, modelled as an increase probability of skill loss, is not a robust explanation for the European unemployment puzzle in the context of a matching model with both endogenous job creation and job destruction.