Fast Rises, Slow Declines: Asymmetric Unemployment Dynamics with Matching Frictions
39 Pages Posted: 18 Oct 2017
Date Written: August 19, 2017
Abstract
This paper argues that the canonical search-and-matching model cannot generate the observed cyclical asymmetry of the unemployment rate. In the United States, the unemployment rate raises quickly and abruptly at the onset of contractions and declines slowly and gradually during expansions. This pattern produces positive skewness in the distribution of unemployment rate changes, while the model produces a counterfactually negative skewness. The key feature of the model responsible for this counterfactual prediction is the convexity of hiring costs in aggregate employment, which leads to excessive responsiveness of job vacancies to positive shocks in periods of high unemployment. I argue that the inability of the model to replicate the cyclical asymmetry in the data stands regardless of its ability to generate realistic fluctuations in unemployment. Furthermore, high replacement rates and real wage rigidity (both fixed and downward rigid wages) - commonly used to enhance amplification of shocks - do not resolve the puzzle, rather they make it worse.
Keywords: Cyclical asymmetry; Matching frictions; Unemployment; Vacancies
JEL Classification: E24; E32; J63; J64
Suggested Citation: Suggested Citation