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Hiring Freeze and Bankruptcy in Unemployment Dynamics

Pietro Garibaldi

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

September 2006

CEPR Discussion Paper No. 5835

This paper proposes a matching model that distinguishes between job creation by existing firms and job creation by firm entrants. The paper argues that vacancy posting and job destruction on the extensive margin, i.e. from firms that enter and exit the labour market, represents a viable mechanism for understanding the cyclical properties of vacancies and unemployment. The model features both hiring freeze and bankruptcies, where the former represents a sudden shut down of vacancy posting at the firm level with labour downsizing governed by natural turnover. A bankrupt firm, conversely, shut down its vacancies and lay offs its stock of workers. Recent research in macroeconomics has shown that a calibration of the Mortensen and Pissarides matching model account for 10 percent of the cyclical variability of the vacancy unemployment ratio displayed by U.S. data. A calibration of the model that explicitly considers hiring freeze and bankruptcy can account for 20 to 35 percent of the variability displayed by the data.

Number of Pages in PDF File: 32

Keywords: Unemployment dynamics, matching models

JEL Classification: J30

Date posted: November 14, 2006  

Suggested Citation

Garibaldi, Pietro, Hiring Freeze and Bankruptcy in Unemployment Dynamics (September 2006). CEPR Discussion Paper No. 5835. Available at SSRN: http://ssrn.com/abstract=944869

Contact Information

Pietro Garibaldi (Contact Author)
Bocconi University - Department of Economics ( email )
Via Gobbi 5
Milan, 20136
+39 02 5836 5422 (Phone)
+39 02 5836 5343 (Fax)
HOME PAGE: http://www.frdb.org/~pietrogaribaldi/
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Feedback to SSRN

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