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The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?

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  • Ch. Pissarides

Abstract

The author discusses the failure of the canonical search and matching model to explain the cyclical volatility in the job finding rate. The author - the Nobel Prize winner in economics in 2010 - shows that job creation in the model is influenced by wages in new matches. He summarizes microeconometric evidence and finds that wages in new matches are volatile and consistent with the models key predictions. Therefore, explanations of the unemployment volatility puzzle have to preserve the cyclical volatility of wages. The author discusses a modification of the model, based on fixed matching costs, that can increase cyclical unemployment volatility and is consistent with wage flexibility in new matches.

Suggested Citation

  • Ch. Pissarides, 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 1.
    • Handle: RePEc:nos:voprec:y:2011:id:1239
    DOI: 10.32609/0042-8736-2011-1-65-88
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