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State dependence in labor market fluctuations

Pizzinelli, Carlo, Theodoridis, Konstantinos and Zanetti, Francesco 2020. State dependence in labor market fluctuations. International Economic Review 61 (3) , pp. 1027-1072. 10.1111/iere.12448
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This paper documents state dependence in labor market uctuations. Using a Threshold Vector Autoregression model (TVAR), we establish that the unemployment rate, the job separation rate, and the job finding rate 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 percent of the state dependence in the unemployment rate, 76 percent for the separation rate and 36 percent for the job finding rate. The key channel underpinning state dependence in both job separation and job finding rates is the interaction of the firm's reservation productivity level and the distribution of match-specifc idiosyncratic productivity. Results are robust across several variations to the baseline model.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Publisher: Wiley
ISSN: 0020-6598
Date of First Compliant Deposit: 4 March 2020
Date of Acceptance: 4 March 2020
Last Modified: 17 Aug 2020 13:00

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