Abstract

http://ssrn.com/abstract=2263501
 


 



A Forest Fire Theory of Recessions and Unemployment


Matthew O. Jackson


Stanford University - Department of Economics; Santa Fe Institute; Canadian Institute for Advanced Research (CIFAR)

Pietro Tebaldi


Stanford University - Department of Economics

January 2014


Abstract:     
We develop a model of matching from firms' perspectives and draw resulting conclusions for the macro-dynamics of an economy. The key insight is that firms may wish to hire workers that are bad matches (having low productivity) in high-demand states, even if the worker must be hired to a long-run contract. This results an increasing fraction of bad worker-firm matches as an economy booms, making it increasingly likely that a recession will occur the longer it has been since the last recession, and increasing the depth of the recession when it occurs. While employment is lowest immediately following a recession, an economy has its highest fraction of good to bad matches as it emerges from a recession. These dynamics result in fully-rational, endogenous business cycles featuring non-stationary distributions of unemployment for a given stationary exogenous shock: in particular, the longer it has been since the last recession the more fragile the economy becomes and the more dramatic its response to exogenous shocks. Examining US economic areas data from 1969-2011, we find that the longer the time elapsed since the last recession, the larger the drop in employment during the recession.

Number of Pages in PDF File: 36

Keywords: recessions, employment, unemployment, matching, search, business cycles, macro-dynamics

JEL Classification: E24, E32, D92, D21, D22

working papers series


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Date posted: July 8, 2013 ; Last revised: January 25, 2014

Suggested Citation

Jackson, Matthew O. and Tebaldi, Pietro, A Forest Fire Theory of Recessions and Unemployment (January 2014). Available at SSRN: http://ssrn.com/abstract=2263501 or http://dx.doi.org/10.2139/ssrn.2263501

Contact Information

Matthew O. Jackson (Contact Author)
Stanford University - Department of Economics ( email )
Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
1-650-723-3544 (Phone)
HOME PAGE: http://www.stanford.edu/~jacksonm
Santa Fe Institute
1399 Hyde Park Road
Santa Fe, NM 87501
United States
Canadian Institute for Advanced Research (CIFAR) ( email )
180 Dundas Street West, Suite 1400
Toronto, Ontario
Canada
Pietro Tebaldi
Stanford University - Department of Economics ( email )
Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
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