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Long-term Unemployment over the Business Cycle, Skill Loss, and Monetary Policy

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  • Kienzler, Daniel

Abstract

Movements in long-term unemployment (LTU) exhibit a substantial cyclical component. I develop a business cycle model featuring labor market frictions and skill loss during unemployment to capture various stylized facts about the cyclical behavior of long-term unemployment. I find that the skill loss mechanism helps reproduce negative duration dependence, high persistence in unemployment and output, volatility patterns across macroeconomic variables and the behavior of the incidence of LTU around business cycle turning points. Optimal monetary policy in the presence of skill loss during unemployment calls for a softer reaction to inflation after productivity shocks. The monetary authority accepts more inflation in order to avoid high skill loss during unemployment which would reduce production and hence consumption possibilities.

Suggested Citation

  • Kienzler, Daniel, 2012. "Long-term Unemployment over the Business Cycle, Skill Loss, and Monetary Policy," Working Papers on Finance 1205, University of St. Gallen, School of Finance.
    • Handle: RePEc:usg:sfwpfi:2012:05
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    More about this item

    Keywords

    Long-term unemployment; business cycle; optimal monetary policy.;
    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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