HYSTERESIS IN A NEW KEYNESIAN MODEL

This paper provides a simple, tractable way of incorporating “hysteresis,” in which persistent unemployment takes on structural characteristics, into a macroeconomic model. Hysteresis is modeled as deterioration in labor market matching efficiency as the average duration of unemployment increases. This is embedded in a basic New Keynesian macro model. A decline in labor market matching efficiency would be consistent with the observed rightward shift of the Beveridge curve since the 2007–2009 recession. Hysteresis is shown to lead to larger and more persistent responses of the unemployment rate and unemployment duration to productivity, intertemporal preference, and monetary shocks. Hysteresis also generates an increase in the natural rate of unemployment. (JEL E24, J64, E32)     

UNEMPLOYMENT INSURANCE PAYMENTS AS A SEARCH SUBSIDY: A THEORETICAL ANALYSIS

This paper examines the consequences of a change in unemployment insurance payments. Most previous works on this topic have utilized a job search model to predict that an increase in unemployment insurance payments will lead to an increase in the expected duration of unemployment. It is shown in the paper that this conclusion rests on two assumptions of dubious validity. When these assumptions are replaced by more reasonable ones significantly different predictions are obtained. For example, an increase in unemployment insurance payments is predicted to reduce the number of long term unemployed.     

Sectoral Mobility and Unemployment with Heterogeneous Moving Costs

A simple equilibrium model of sectoral reallocation is developed in order to study the impact of heterogeneous moving costs on unemployment. The model blends key elements of standard sectoral reallocation theory and the competitive search model. Heterogeneity in moving costs is introduced via mobile and immobile workers. The impact of mobile workers on the unemployment rates of mobile and immobile workers is of particular interest. The model shows that the share of mobile workers raises their unemployment rate. The model also shows that when labor mobility is driven by a sectoral level aggregate disturbance, mobile workers can have a non-monotonic, but globally negative impact on the unemployment rate of immobile workers. However, when labor mobility is driven by an idiosyncratic sector-worker match effect, the share of mobile workers raises the unemployment rate of immobile workers.     

SELF‐EMPLOYMENT,EFFICIENCY WAGE,AND PUBLIC POLICIES

Empirical evidence suggests that unemployed workers are much more likely to become self‐employed than wage‐employed workers. Also, higher unemployment benefits significantly reduce the rate of self‐employment. This article develops a model of self‐employment which incorporates transitions between unemployment and self‐employment. It integrates two strands of theoretical literature—models of occupational choice and the efficiency wage models. In this model, a higher unemployment benefit reduces the self‐employment rate and the transition rate of unemployed workers to self‐employment, which is consistent with empirical evidence. (JEL J23, J58, J64)     

The role and significance of endogenous firing costs in a matching model with endogenous job destruction

Traditional models of the labor market assume fixed firing costs. This paper explores the implications of variable firing costs, building this new assumption into a matching model with endogenous job destruction. The available evidence on the outcomes of cases brought to labor courts suggests that firing costs are negatively related with labor market tightness. In such a case, we may no longer invoke “rigidities” on labor markets as the cause of their poor performance. Our model yields three interesting results. First, labor markets may have multiple equilibria that cannot be Pareto-ordered; each with its own configuration in terms of average duration of unemployment and filled jobs, as well as employment protection. Second, the variability of firing costs produces a positive externality affecting the stability properties of these equilibria. Finally, the two externalities affect the efficiency of the social optimum, modifying the Hosios [Hosios, A.J., 1990. On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57, 279–298] condition. We use these results to interpret the recent history of European unemployment.     

Household job search: A theoretical and empirical model

This article links the literature on family decision making and the economics of job search by examining job search by an unemployed individual within a household context. A theoretical model was developed which demonstrates the interdependence of the utility of household members when one is searching for work. The costs of search are borne by all household members while the benefits are captured in the searcher's expected future wage. A reservation wage was shown to be determined by household financing options, and the perception of relevant labor market parameters. An empirical model of the reservation wage for a sample of unemployment insurance recipients was estimated using two-stage least squares. Results, reported for male and female subgroups, support the hypotheses derived from the household job search model. In particular, the reservation wage was shown to depend on unemployment duration, labor market conditions, increased labor force participation of other household members, use of household assets to finance search, existence of dependents, and unemployment insurance benefits.     

DO UNEMPLOYMENT BENEFITS AFFECT ON‐THE‐JOB SEARCH? EVIDENCE FROM LABOR TURNOVER BEFORE ESTABLISHMENT CLOSURES

We develop a job search model that predicts that potential job losers would reduce on‐the‐job search (OTJS) effort and job‐to‐job transitions before layoffs, in response to an increase in the potential duration of unemployment benefits (UB). To test this prediction, we exploit changes in the maximum potential duration of benefits in Germany to analyze how it affected labor turnover before establishment closings. The evidence supports the model prediction that workers with longer potential benefit duration are more likely to remain with their establishments until closure and to enter nonemployment. These findings indicate that the effects of UB on the OTJS decisions of potential job losers should be considered in the optimal design of the parameters of unemployment insurance systems. (JEL J63, J64, J65)     

INVOLUNTARY, EMPLOYMENT IN CONTRACTS WITH RISKY JOB SEARCH

The implication of partially insurable job search risk for incentive compatibility in a standard contracting framework are explored. When unemployment spells provoke job search, workers face risk in spell duration and reemployment wages. When search effort is not variable, contracts including unemployment insurance will yield involuntary employment. When search effort is diminished by UI benefits, firms shift some compensation back to wages, increasing the relative attractiveness of employment. The analysis begins with a theorem on incomplete insurance by Imai, Geanakoplos and Ito [1981] for which a simple proof and economic intuition are provided.     

Unemployment Transitions among Brazilians in the United States and Canada

This study uses the job search framework to examine the unemployment experiences of Brazilian immigrants in the North American labour force. Primary data gathered in Canada and the United States is used in these analyses. The model generally used to monitor transitions among the native‐born was modified to make it more appropriate to the immigrant experience. To do this a composite model was constructed that incorporates variables unique to the immigrant experience. Event history analyses revealed that, in general, job search theory is very relevant for examining the transitions of immigrants. However, not all standard measures behaved as predicted (e.g. reservation wage). Several immigrant specific variables were very significant (e.g. target earner and legal status) and improved the overall model fit. Brazilians who worked primarily with other co‐ethnics were more likely to become re‐employed than those who did not, while working for a Brazilian employer had no effect on being re‐employed. US/Canadian comparisons also revealed that residents of Canada endured longer periods of unemployment. We believe this result is because Canadian residents had greater access to public services and, as such, were able to have higher reservation wages.     

PROFIT-SHARES, BARGAINING, AND UNEMPLOYMENT

This paper considers the effect of profit sharing on unemployment in a simple model with an employment externality, overhead costs, and free entry. When wages are determined by Nash bargains and employment is set by firms, equilibrium unemployment is unambiguously reduced by mandated profit sharing. However, a bargained profit share may have the perverse effect of lowering both employment and compensation in general equilibrium. If overhead costs relevant to firms' entry decisions are excluded from the profit share accounting, then a mandated profit share may also have such a perverse effect. (JEL E24)     

THE UNEMPLOYMENT VOLATILITY PUZZLE: THE ROLE OF MATCHING COSTS REVISITED

Pissarides has argued that the standard search model with sunk fixed matching costs increases unemployment volatility without introducing an unrealistic response of wages of new matches to productivity shocks. We revise the role of matching costs and show that when these costs are not sunk and, therefore, can be partially passed on to new hired workers in the form of lower wages, the amplification mechanism of fixed matching costs is considerably reduced. Finally, we observe that an empirical reasonable share of sunk costs is not able to match the volatility of unemployment without introducing unrealistic sensitivity to unemployment benefits. (JEL E32, J32, J64)     

LABOR MARKET SEARCH: AN EXPERIMENTAL STUDY

The theoretical results derived from models of economic search have implications which relate to the structure and performance of labor markets. Utilizing a series of laboratory experiments, we attempt to capture many of the features of workers' search and also the conditions under which labor markets operate. By varying certain of the experimental conditions, we are able to determine the searchers' responses to changes in the terms of unemployment insurance, to the existence of a minimum wage, and to different states of information about the underlying distribution of wages. In most cases the behavior of the searchers is consistent with that predicted by theory.     

A Model of the Macroeconomic Effects of Privatization on Employment in Transition and Developing Countries with an Application to China

It is generally agreed that privatization of state-owned enterprises improves economic efficiency, but it is also widely feared that it exacerbates unemployment especially in transition and developing economies. This paper proposes a theoretical model of the macroeconomic relationships between privatization, efficiency, output, and employment. The model explains how privatization affects employment in transition and developing economies through different, and often opposing, channels. As a result, job losses at firms being privatized may result in overall job gains or losses in the economy, depending on the macroeconomic conditions. We apply this model to China and find that the model provides an intuitively appealing explanation for the job gains and losses caused by privatization in China during its transition. The model further suggests policies to maximize the gains and minimize the costs of privatization.     

From wage rigidity to labour market institution rigidity: A turning-point in explaining unemployment?

In this paper we offer a critical discussion about the concept of labour market rigidity in the light of recent theoretical approaches that have aimed to provide sound micro-foundations to the presence of unemployment in market economies. We point out that the concept of labour market rigidity usually referred to in such theories has changed over time, involving in succession the rigidity of wages, contracts and labour market institutions. We also appraise the factors that lead labour market institutions rigidity, stressed by the search literature, to challenge the more widespread explanation of unemployment grounded on wage rigidity. Moreover, we analyse some theoretical and empirical issues that cast doubt on the ability to deal with unemployment, disentangling the role of institutional rigidities from that of wage stickiness.     

PROFIT SHARING, WAGE BARGAINING, AND UNEMPLOYMENT

The Paper examines the effects of profit sharing in an economy with decentralized wage bargaining. Profit sharing makes workers' income more sensitive to wage changes, and this leads to wage moderation. But economy-wide profit sharing may also improve worker's outside income opportunities, and this strengthens the union's hand in bargaining and tend to raise wages. It turns out that equilibrium unemployment is reduced by profit sharing as long as the elasticity of substitution between labour and capital is less than one, whereas unemployment is increased if the elasticity of substitution is greater than one.     

Economic and Psychological Models of Job Search Behavior of the Unemployed

Economic and psychological theories relating tojob search behavior by the unemployed are considered.There exists a noticeable contrast between the economicapproach which is almost exclusively based on a single model of the rational job seeker, andthe diverse approaches adopted by psychologists.Accordingly, the paper concentrates on areas of researchby psychologists which are relevant to the economic model. The paper starts with an overview of theresearch program in economics. Next, the psychologicalliterature on the general well-being of the unemployedis briefly surveyed; this research might be useful in informing economic studies of theeffects of the duration of unemployment on an individuals search behavior. Two psychological approaches to jobsearch behavior are then discussed, namelyexpectancy-value theory and prospect theory. Findings using theexpectancy-value approach suggest that certainpsychological variables, including normative pressures,might play an important role in job search. In addition, these findings highlight the complexrelationship between job expectations and searchintensity. Finally, it is suggested that the role andimportance of certain psychological variables such asstatus might be expected to vary over the course ofunemployment.     

The Impact of Gender and Marital Status on Attitudes and Responses to Unemployment

The study examined differences in job search intensity, attitudes toward unemployment, and related responses among a sample of Israelis, based on gender and marital status (single vs. married). The findings indicate that gender-based differences were greater than those based on marital status. Regarding the impact of gender, women were more likely than men to reject jobs because of conflict with family responsibilities or unsuitable working conditions. Both men and women mentioned gender atypical characteristics of occupations as a reason for rejecting employement, although this tendency was especially prevalent among married women. Women also reported more stress reactions and decline in health as an outcome of unemployment. Regarding the impact of marital status, married men tended to seek jobs more intensively than respondents in the other research groups. Single respondents of both sexes were more likely than their married counterparts to view unemployment as a personal advantage because it gives them more time to themselves. Moreover, married respondents of both sexes were more likely to reject job offers because of conflict with family responsibilities or unsuitable working conditions. In light of the findings, practical recommendations for counselors are provided.     

Labor Supply,Labor Demand,and Men's Underemployment in Rural and Urban Labor Markets1

Abstract This paper examines how the structure of the labor market differentially affects white men's underemployment in urban and rural areas. The effects of labor supply and demand, including special measures of public employment and two previously neglected aspects of competition—global industrial competition and sexual labor market competition—on unemployment, low-wage employment, and low-hours employment are examined. A higher proportion of females in the labor force in rural labor market areas provides benefits to men in the form of lower unemployment, but also costs them, through an increased prevalence of low-wage employment, while the opposite effects are evident for areas with concentrations in periphery service industries. The findings suggest that industrial restructuring in the form of increased foreign competition and an increased loss of core transformative jobs are especially threatening to rural men's employment adequacy.     

RELATIVE PRICE DISPERSION, AGGREGATE PRICE MOVEMENT, AND THE NATURAL RATE OF UNEMPLOYMENT

This paper develops a model of relative price stickiness and examines its implications for the relationship between relative prices, inflation, and the natural rate of unemployment. Estimation of the model demonstrates that causality in the relationship between relative and aggregate prices runs in both directions. However, microeconomic disturbances have been the primary source of relative price change variance over the postwar period, and these micro disturbances have exerted a strong effect on inflation in the short run. It also is shown that micro relative price change dispersion has had a significant influence on the natural rate of unemployment.     

Unemployment,immigration, and NAFTA: a panel study of ten major U.S. industries

We conduct a pooled cross-section and time-series analysis of the unemployment rates across ten major industries in the U.S. from 1983 to 1994 to assess the effect of NAFTA and immigration. Our results indicate that the output produced by the industry, unemployment benefit coverage, and interest rates are significant determinants of industry unemployment rates, but union presence does not affect industry unemployment. Both Canadian and Mexican immigrants appear to be complements to the U.S. labor force, with Canadian immigrants highly complementary to American labor. Finally, the Chow test provides no evidence that NAFTA has changed the structure of unemployment determination in these industries. We are indebted to Emily Hoffman and Matthew Higgins for their comments and suggestions. The usual disclaimer applies.