DP4183 European Unemployment and Turbulence Revisited in a Matching Model

Author(s): Lars Ljungqvist, Thomas J Sargent
Publication Date: January 2004
Keyword(s): european unemployment, turbulence
JEL(s): E24, J64
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4183

We recalibrate den Haan, Haefke, and Ramey's matching model to incorporate our preferred specification of 'turbulence' as causing distinct dynamics of human capital after voluntary and involuntary job losses. Under our calibration, with high unemployment benefits, an increase in turbulence increases the unemployment rate and the duration of unemployment while leaving the inflow rate into unemployment roughly unchanged, mirroring features of European data in the 1980s and 1990s. The essential issue is that den Haan, Haefke, and Ramey specify that in turbulent times workers experiencing layoffs and quits are both subject to instantaneous skill losses, while we restrict instantaneous skill losses to laid off workers.