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Business Volatility, Job Destruction, and Unemployment


Steven J. Davis


University of Chicago; National Bureau of Economic Research (NBER)

Jason Faberman


Federal Reserve Bank of Chicago; Bureau of Labor Statistics - Office of Employment and Unemployment Statistics

John Haltiwanger


University of Maryland - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)

Ron S. Jarmin


U.S. Census Bureau

Javier Miranda


U.S. Census Bureau - Center for Economic Studies

September 2008

NBER Working Paper No. w14300

Abstract:     
Unemployment inflows fell from 4 percent of employment per month in the early 1980s to 2 percent or less by the mid 1990s and thereafter. U.S. data also show a secular decline in the job destruction rate and the volatility of firm-level employment growth rates. We interpret this decline as a decrease in the intensity of idiosyncratic labor demand shocks, a key parameter in search and matching models of unemployment. According to these models, a lower intensity of idiosyncratic shocks produces less job destruction, fewer workers flowing through the unemployment pool and less frictional unemployment. To evaluate the importance of this theoretical mechanism, we relate industry-level unemployment flows from 1977 to 2005 to industry-level indicators for the intensity of idiosyncratic shocks. Unlike previous research, we focus on the lower frequency relationship of job destruction and business volatility to unemployment flows. We find strong evidence that declines in the intensity of idiosyncratic labor demand shocks drove big declines in the incidence and rate of unemployment. This evidence implies that the unemployment rate has become much less sensitive to cyclical movements in the job-finding rate.

Number of Pages in PDF File: 51

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Date posted: September 8, 2008  

Suggested Citation

Davis, Steven J. and Faberman, Jason and Haltiwanger, John and Jarmin, Ron S. and Miranda, Javier, Business Volatility, Job Destruction, and Unemployment (September 2008). NBER Working Paper No. w14300. Available at SSRN: http://ssrn.com/abstract=1264563

Contact Information

Steven J. Davis (Contact Author)
University of Chicago ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7312 (Phone)
773-702-0458 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
R. Jason Faberman
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604
United States
(312) 322-5274 (Phone)
(312) 322-2357 (Fax)
HOME PAGE: http://www.chicagofed.org/webpages/people/faberman_jason.cfm
Bureau of Labor Statistics - Office of Employment and Unemployment Statistics ( email )
2 Massachusetts Avenue, NE
Washington, DC 20212
United States
John C. Haltiwanger
University of Maryland - Department of Economics ( email )
College Park, MD 20742
United States
301-405-3504 (Phone)
301-405-3542 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Institute for the Study of Labor (IZA) ( email )
P.O. Box 7240
Bonn, D-53072
Germany
Ron S. Jarmin
U.S. Census Bureau ( email )
4700 Silver Hill Road
Washington, DC 20233
United States
Javier Miranda
U.S. Census Bureau - Center for Economic Studies ( email )
4700 Silver Hill Road
Washington, DC 20233
United States
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References:  39
Citations:  64

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