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)
Stanford University - Department of Economics
We introduce a general model of matching from firms' perspectives (that nests standard search models as special cases), and show that it yields non-stationary distributions of employment in response to stationary exogenous shocks: the longer since the last recession the larger the drop in employment. The key insight is that in high-demand states firms prefer to hire a low productivity worker than to have a vacancy. Bad worker-firm matches accumulate during upswings, increasing the drop in employment when a negative shock eventually hits the economy. We provide empirical evidence for this in US regional data from 1969-2012.
Number of Pages in PDF File: 49
Keywords: recessions, employment, unemployment, matching, search, business cycles, macro-dynamics
JEL Classification: E24, E32, D92, D21, D22working papers series
Date posted: July 8, 2013 ; Last revised: July 10, 2014
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