Unemployment and endogenous reallocation over the business cycle

Carlos Carrillo-Tudel, Ludo Visschers

Research output: Working paperDiscussion paper

Abstract

This paper studies unemployed workers’ decisions to change occupations, and their impact on fluctuations in aggregate unemployment and its underlying duration distribution. We develop an analytically and computationally tractable stochastic equilibrium model with heterogenous labor markets. In this model three different types of unemployment arise: search, rest and reallocation unemployment. We document new evidence on unemployed workers’ gross occupational mobility and use it to calibrate the model. We show that rest unemployment is the main driver of unemployment fluctuations over the business cycle and causes cyclical unemployment to be highly volatile. The resulting unemployment duration distribution generated by the model responds realistically to the business cycle, creating substantial longer-term
unemployment in downturns. Finally, rest unemployment also makes our model simultaneously consistent with procyclical occupational mobility of the unemployed, countercyclical job separations into unemployment and a negatively-sloped Beveridge curve.
Original languageEnglish
PublisherEdinburgh School of Economics Discussion Paper Series
Pages1-83
Number of pages83
Publication statusPublished - 1 May 2014

Keywords

  • unemployment
  • business cycle
  • rest
  • search
  • occupational mobility.

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