Revisiting the hypothesis of high discounts and high unemployment

Paolo Martellini, Guido Menzio, Ludo Visschers

Research output: Contribution to journalArticlepeer-review

Abstract

We revisit the hypothesis that cyclical fluctuations in unemployment are caused by shocks to the discount rate. We use a simple but rich search-theoretic model of the labour market in which the UE, EU and EE rates are all endogenous. Analytically, we show that an increase in the discount rate lowers the UE rate and, under some natural conditions, it lowers the EU rate. Quantitatively, we show that an increase in the discount rate from 4 to 10% generates a 3.5% decline in the UE rate and a 6% decline in the EU rate. These findings are at odds with the actual behaviour of the US labour market over the business cycle, which features a negative comovement between the UE and EU rates.
Original languageEnglish
Pages (from-to)1-37
Number of pages37
JournalThe Economic Journal
Volume138
Early online date26 Dec 2020
DOIs
Publication statusE-pub ahead of print - 26 Dec 2020

Keywords

  • unemployment fluctuations
  • discount rate
  • human capital
  • lifecycle earnings

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