State dependence in labor market fluctuations: evidence, theory, and policy implications
This paper documents state dependence in labor market ?uctuations. Using a Threshold Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job ?nding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity....
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| Format: | Working paper |
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University of Oxford
2018
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| Summary: | This paper documents state dependence in labor market ?uctuations. Using a Threshold Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job ?nding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. The transition rates into and out of employment embed state dependence through the interaction of reservation productivity levels and the distribution of match-speci?c idiosyncratic productivity. State dependence implies that the e?ect of labor market reforms is di?erent across phases of the business cycle. A permanent removal of layo? taxes is welfare enhancing in the long run, but it involves distinct short-run costs depending on the initial state of the economy. The welfare gain of a tax removal implemented in a low-productivity state is 4.9 percent larger than the same reform enacted in a state with high aggregate productivity. |
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