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The Dark Corners of the Labor Market

Author

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  • Vincent Sterk

    (Department of Economics University College London (UCL)
    Centre for Macroeconomics (CFM))

Abstract

Standard models predict that episodes of high unemployment are followed by recoveries. This paper shows, by contrast, that a large shock may set the economy on a path towards very high unemployment, with no recovery in sight. First, I estimate a reduced-form model of flows in the U.S. labor market, allowing for the possibility of multiple steady states. Next, I estimate a non-linear search and matching model, in which multiplicity of steady states may arise due to skill losses upon unemployment, following Pissarides (1992). In both cases, estimates imply a stable steady state with around 5 percent unemployment and an unstable one with around 10 percent unemployment. The search and matching model can explain observed job finding rates remarkably well, due to its strong endogenous persistence mechanism.

Suggested Citation

  • Vincent Sterk, 2016. "The Dark Corners of the Labor Market," Discussion Papers 1603, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:1603
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    References listed on IDEAS

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    Cited by:

    1. Kandoussi, Malak & Langot, François, 2022. "Uncertainty shocks and unemployment dynamics," Economics Letters, Elsevier, vol. 219(C).
    2. Lalé, Etienne, 2018. "Loss of skill and labor market fluctuations," Labour Economics, Elsevier, vol. 50(C), pages 20-31.
    3. Florian Sniekers, 2018. "Persistence And Volatility Of Beveridge Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 665-698, May.
    4. Jesus Fernandez-Villaverde & Federico Mandelman & Francesco Zanetti & Yang Yu, 2018. "Search Complementarities, Aggregate Fluctuations and Fiscal Policy," 2018 Meeting Papers 386, Society for Economic Dynamics.
    5. Niklas Engbom, 2019. "Application Cycles," 2019 Meeting Papers 1170, Society for Economic Dynamics.
    6. Sushant Acharya & Julien Bengui & Keshav Dogra & Shu Lin Wee, 2022. "Slow Recoveries and Unemployment Traps: Monetary Policy in a Time of Hysteresis," The Economic Journal, Royal Economic Society, vol. 132(646), pages 2007-2047.
    7. Prein, Timm, 2019. "Persistent Unemployment, Sovereign Debt Crises, and the Impact of Haircuts," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203654, Verein für Socialpolitik / German Economic Association, revised 2019.
    8. Ross Doppelt, 2019. "Skill Flows: A Theory of Human Capital and Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 84-122, January.
    9. Sushant Acharya & Julien Bengui & Keshav Dogra & Shu Lin Wee, 2016. "Escaping Unemployment Traps," Liberty Street Economics 20161116, Federal Reserve Bank of New York.
    10. Flemming, Jean, 2020. "Skill accumulation in the market and at home," Journal of Economic Theory, Elsevier, vol. 189(C).

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    More about this item

    Keywords

    Unemployment; Multiple Steady States; Non-linear Estimation;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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