Revisiting the hypothesis of high discounts and high unemployment

Paolo Martellini; Guido Menzio; Ludo Visschers

doi:10.1093/ej/ueaa138

Revisiting the hypothesis of high discounts and high unemployment

Paolo Martellini
, Guido Menzio
, Ludo Visschers

School of Economics

Research output: Contribution to journal › Article › peer-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 language	English
Pages (from-to)	1-37
Number of pages	37
Journal	The Economic Journal
Volume	138
Early online date	26 Dec 2020
DOIs	https://doi.org/10.1093/ej/ueaa138
Publication status	E-pub ahead of print - 26 Dec 2020

Keywords / Materials (for Non-textual outputs)

unemployment fluctuations
discount rate
human capital
lifecycle earnings

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10.1093/ej/ueaa138

MartelliniEtalEJ2020RevisitingTheHypothesis
This is a pre-copyedited, author-produced version of an article accepted for publication in The Economic Journal following peer review. The version of record Paolo Martellini, Guido Menzio, Ludo Visschers, Revisiting the Hypothesis of High Discounts and High Unemployment, The Economic Journal, , ueaa138, https://doi.org/10.1093/ej/ueaa138 is available online at:https://academic.oup.com/ej/advance-article/doi/10.1093/ej/ueaa138/6050758.
Accepted author manuscript, 1.46 MB

MacCaLM: Labour and Credit Market Foundations of the Macroeconomy
Moore, J. (Principal Investigator), Belot, M. (Co-investigator), Elsby, M. (Co-investigator), Guell, M. (Co-investigator), Kircher, P. (Co-investigator), Rodriguez Mora, S. (Co-investigator), Snell, A. (Co-investigator), Thomas, J. (Co-investigator), Visschers, L. (Co-investigator), Worrall, T. (Co-investigator) & Zymek, R. (Other)
ESRC
1/06/15 → 31/05/22
Project: Research

Cite this

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title = "Revisiting the hypothesis of high discounts and high unemployment",

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.",

keywords = "unemployment fluctuations, discount rate, human capital, lifecycle earnings",

author = "Paolo Martellini and Guido Menzio and Ludo Visschers",

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doi = "10.1093/ej/ueaa138",

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pages = "1--37",

journal = "The Economic Journal",

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T1 - Revisiting the hypothesis of high discounts and high unemployment

AU - Martellini, Paolo

AU - Menzio, Guido

AU - Visschers, Ludo

PY - 2020/12/26

Y1 - 2020/12/26

N2 - 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.

AB - 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.

KW - unemployment fluctuations

KW - discount rate

KW - human capital

KW - lifecycle earnings

U2 - 10.1093/ej/ueaa138

DO - 10.1093/ej/ueaa138

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SP - 1

EP - 37

JO - The Economic Journal

JF - The Economic Journal

ER -

Revisiting the hypothesis of high discounts and high unemployment

Abstract

Keywords / Materials (for Non-textual outputs)

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Projects

MacCaLM: Labour and Credit Market Foundations of the Macroeconomy

Cite this