Are Turbulences of Sargent and Ljungqvist consistent with lower Aggregate Volatility?

Ljungqvist and Sargent (1998, 2008, 2007a, 2007b) impute the persistence of long term unemployment in Europe since 80s to the welfare state’s inability to cope with more turbulent times. They claim that global economic conditions have been more turbulent in the 80s and 90s, comparing to the earlier decades, and construct a model based on search with a turbulence at the micro level to reproduce the evolution of unemployment in laissez-faire and welfare economies. Plethora of research, among others Stock and Watson (2002, 2005), document on the other hand a fall in the aggregate volatility of macro series in the USA and G7 countries since 80s. We attempt to reconcile these two findings. Can the model of Ljungqvist and Sargent (1998) based on the micro turbulence be consistent with the macro data? We look at the macro series of productivity and real wages (plus real GDP and employment) for a number of countries and find a decline in the aggregate volatility since the 80s. We then generate the macro series based on Ljungqvist and Sargent (1998) search model and establish what sort of aggregate volatility it predicts for welfare and laissez-faire economies under different degrees of turbulence. We find that, although the model fails to match the data exactly, it has a potential to be consistent with labor market outcomes but is unable to match broader aggregate measures.