The Conditional Ins And Outs Of French Unemployment

In this paper, I investigate the conditional contributions of the ins and outs of unemployment from both empirical and theoretical perspectives. Based on a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) theoretical framework, I estimate a sign restriction Vector Auto Regressive (VAR) model using French data. To identify the origins of unemployment dynamics in terms of worker transition rates, I simulate two shocks: one on the supply side (technology) and the other on the demand side (monetary). The VAR model reveals that the contributions of transition rates in explaining unemployment differ across shocks. After a technology shock, unemployment fluctuations are mainly explained by the job finding process, while the contributions of the two margins are more balanced for the monetary shock. The theoretical model is not able to reproduce the underlying mechanisms inducing unemployment. In particular, the conditional contributions of the job separation margin are overestimated each time. For instance, after a technology shock, 60% of unemployment changes are generated by this margin, while the data suggest a contribution of 28%. This paper strongly indicates that, in its standard formulation, a search and matching DSGE model featuring endogenous job separations is not able to replicate the dominating influence of the outflow process.