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Unemployment Crises

Fisher College of Business Working Paper No. 2014-03-11

Charles A. Dice Center Working Paper No. 2014-11

49 Pages Posted: 31 Mar 2013 Last revised: 16 Jul 2014

Nicolas Petrosky-Nadeau

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2013

Abstract

A search and matching model, when calibrated to the mean and volatility of unemployment in the postwar sample, can potentially explain the unemployment crisis in the Great Depression. The limited responses of wages from credible bargaining to labor market conditions, along with the congestion externality from matching frictions, cause the unemployment rate to rise sharply in recessions but decline gradually in booms. The frequency, severity, and persistence of unemployment crises in the model are quantitatively consistent with U.S. historical time series. The welfare gain from eliminating business cycle fluctuations is large.

Keywords: Search and matching frictions, unemployment crises, the unemployment volatility puzzle, projection, nonlinear impulse response functions, the Great Depression

JEL Classification: E24, E32, J63, J64

Suggested Citation

Petrosky-Nadeau, Nicolas and Zhang, Lu, Unemployment Crises (December 1, 2013). Fisher College of Business Working Paper No. 2014-03-11. Available at SSRN: https://ssrn.com/abstract=2241695 or http://dx.doi.org/10.2139/ssrn.2241695

Nicolas Petrosky-Nadeau (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Lu Zhang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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