Do job destruction shocks matter in the theory of unemployment?

Melvyn G. Coles, Ali Moghaddasi Kelishomi

Research output: Contribution to journalArticle

Abstract

Because the data show that market tightness is not orthogonal to unemployment, this paper identifies the many empirical difficulties caused by adopting the free entry of vacancies assumption in the Diamond- Mortensen-Pissarides (DMP) framework. Relaxing the free entry assumption and using Simulated Method of Moments (SMM) finds the vacancy creation process is less than infinitely elastic. Because a recession- leading job separation shock then causes vacancies to fall as unemployment increases, the ad hoc restriction to zero job separation shocks (to generate Beveridge curve dynamics) becomes redundant. In contrast to standard arguments, the calibrated model finds the job separation process drives unemployment volatility over the cycle.

Original languageEnglish (US)
Pages (from-to)118-136
Number of pages19
JournalAmerican Economic Journal: Macroeconomics
Volume10
Issue number3
DOIs
StatePublished - Jul 1 2018

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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